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COSTS 



COSTS 

Their Compilation 

and Use in 

Management 



By 
IRVING A. BERNDT 



DIRECTOR, SOCIETY OF INDUSTRIAL ENGINEERS; 
ASSOCIATE, AMERICAN SOCIETY OF MECHANICAL ENGINEERS; 
MEMBER EDITORIAL BOARD OF 100%, 
THE EFFICIENCY MAGAZINE 



First Edition 




CHICAGO 
H. P. GOULD COMPANY 



4* y 



Copyright 1920 by H. P. Gould Company 

and subject matter taken in part from previous publications of 

H. P. Gould Company protected by Copyrights granted 

on the dates of former publications. 






2Hje (Cnllrgtatr Prrss 

George Banta Publishing Company 

Menasha, Wisconsin 



©CI.A571232 



. 



30 iMg Mattyt 



FOREWORD 

This volume is dedicated to just two purposes. 

First, to promote the most extensive use and 
application of Costs in management and pro- 
duction. 

Second, to serve as a reference to those already 
using costs, suggesting standards by which they 
can test and measure their present methods and 
applications and determine whether or not their 
methods follow modern principles and philosophy, 
whether or not they are collecting usable data 
and, most important of all, whether or not they 
are using that which they do collect to the fullest 
extent possible. 

It is not intended to be a "complete cost keeper." 
It does not offer a cut-and-dried, ready-made cost 
system. It is not a guide or reference to any one 
particular system of costing. 

Much of the material included was written a 
number of years back in the form of separate 
articles published monthly in the pages of 100% 
Magazine. During this period the writer secured 
much valuable aid and inspiration from the inter- 
esting discussions at the editorial board meetings 



viii FOREWORD 

of 100%, The Efficiency Magazine as arranged by- 
Harold P. Gould, its Editor-in-chief, and wishes 
to acknowledge his indebtedness for this contact 
and influence. When it was assembled and edited 
the writer found very little necessity to change 
his opinions or conclusions and since it has had this 
test of time, feels justified in offering it in this 
form as a permanent reference. 

The writer wishes to acknowledge his apprecia- 
tion and indebtedness to Edward L. Ryerson, Jr., 
with whom he was associated during the periods 
when much of the original material was written, 
inasmuch as a great many of the opinions, conclu- 
sions and arguments were developed during the 
many interesting discussions of the subject with 
him. 

Sincere acknowledgment is also recorded here to 
his present associates, Mr. C. E. Knoeppel and 
Mr. J. P. Jordan, for their constructively critical 
review of all the material contained herein in its 
present form. 

Irving A. Berndt 



INTRODUCTION 

The consequences of the World War have been 
felt in all phases of commercial life and the slogan 
of "production at any price" will continue to 
influence our ideas of relative values through a 
long period of reconstruction. With speed the 
predominating factor, extravagance has resulted 
to such a wholesale extent that a reaction must 
follow. Results will again more than ever before 
be determined by accurate cost comparisons. 

Mr. Irving Berndt's treatment of this subject, 
with its clear analysis of the relationships between 
costs and successful scientific management, is a 
valuable contribution to the study of a problem so 
vitally important in this period of readjustments. 
The philosophy of cost accounting and its effec- 
tiveness in Executive Control, described by spe- 
cific evidences, not by any particular system of cost 
keeping, should give the general executive or the 
cost accountant a new inspiration. 

The trend of modern business toward the highest 
degree of efficiency requires exhaustive scientific 
analysis of causes and results which can only be 
obtained by a progressive and aggressive scheme 
of education of both employer and employee. 
The valuable use of cost keeping as described by 
Mr. Berndt has this idea as one of its principal 
motives and is the result of his successful applica- 
tion of this theory over a period of years when we 
were jointly interested in the development of this 



INTRODUCTION 



work. His carefully worked out deductions have 
justified themselves in actual practice; they have 
grown more important and more clearly defined 
with use. With this background of successful 
application the author now presents them in this 
compact and illuminating treatise as a valuable 
aid in modern business methods. 

Rather than a detailed description of cost find- 
ing we have here an interpretation of cost as related 
to the science of management and as a controlling 
influence upon both Capital and Labor. To 
emphasize the great importance of the relationship 
between analytical cost and management as 
affecting the employer and employee I can do no 
better than to quote Mr. Berndt as follows : 

"Just so long as managers know little about true 
costs and fail to tell labor the little they do know, 
just so long will there be difficulty in securing the 
co-operative spirit. There must be established 
a more satisfactory common ground between 
Capital and Labor. They must learn to speak a 
common language of values, interpreted in 
terms of cost of productive effort and relation 
between performance and reward." 

This presentation of the subject of cost account- 
ing gives the reader an understanding frequently 
lost sight of when illustrated only by a tabulation 
of figures and a collection of forms. Here is a 
scheme with a practical application and a signifi- 
cant message of real value. 

,, • Edward L. Ryerson, Jr. 



CONTENTS 

Chapter Pago 

I. The Cost Factor in Management . 17 
Six Aids 18 

II. Costs During Prosperous Periods 22 

Correct Organization Necessary 23 
Tendency for Larger Waste 25 
Standard Burden Rates 26 

III. Costs During Depressions ... 27 

Control and Reduction of Costs 29 
Making Up Losses from the Outside 30 

IV. Co-operation on Cost Methods . . 32 

Federal Trade Commission Reports 32 
U. S. Government Co-operation 33 
Depreciation Neglected 34 

V. Elements of Costs . . . . . 36 

Labor — Direct and Indirect 38 
Material and Maintenance 39 
General Expenses 39, 40 

VI. Labor Costs 41 

Collection of Data 41 

Necessity for Complete Records 44 

Payroll Graph 44 

VII. Classification of Direct Labor Costs 46 

Definition "Direct" and "Indirect" 46, 47 
Eight Units for Classification 48 

VIII. Classification of Indirect Labor 

Costs 49 

Five Main Classes 50 
Sub-Classification 51 



xii CONTENTS 

Chapter Page 

IX. Collection and Recording of Labor 

Costs 54 

Standard Instructions Essential 55 

Use of Timing Devices 56 

Methods of Reporting Elapsed Time 56, 57 

Advantages of Timekeeping 58 

X. Pay Roll Distribution . . . .59 

Detailed Distribution Necessary 59 

Check on Payroll 59 

Tracing Errors 60 

Daily Statement on Piece Workers 61 

XI. Direct Material Costs .... 62 

First Cost Plus Handling 63 

Classification of Materials 64 

Raw Materials in Large Quantities 65 

Record of Materials Issued 65 

Control of Purchases Promotes Economy 67 

Inspection of Material Purchased 68 

Waste Analysis 68 

XII. Indirect Material Costs ... 70 

Materials Used for Supervision 70 

Maintenance, etc. 70 

Methods of Distribution 71, 72 

Requisitions for Withdrawals 73 

Five General Divisions for Classification 74 

Securing Co-operation to Reduce Costs 75 

Executive Approval of Purchase Requisitions 76 

XIII. Burden Costs 77 

Ignorance as to Meaning 77 

Important Work for Cost Accountant 78 

XIV. Burden Classifications .... 80 

Six Principal Expenses 80 

Defining Burden and General Expense 81 

Furnishing Cost Information to Workers 83 



CONTENTS xiii 

Chapter Page 

XV. Fixed Charges 84 

Items That Should Be Included 84 
Classification of Terms 85 

XVI. Administration and Selling Expense 87 

Charging to Departments 87 
Comparisons to Detect Variations 88 
Minimum Classifications 88 
Analysis of Selling Expenses 89 

XVII. Interest on Investment Charged as 

Cost 90 

Two Strong Arguments, pro and con 90 

An Interesting Public Debate 91 

Court Decisions 94 

Opinions of a Prominent Industrial Engineer 95 

XVIII. Interest on Investment Taken from 

Profit 97 

Mr. C. E. Knoeppel's Testimony on This Point 

before the Federal Trade Commission 97 
Opinion of Mr. H. L. Gantt 99 

XIX. Depreciation 101 

Why Depreciation Is Misunderstood 101 
Excess Profits Tax Forced Attention to Depre- 
ciation 102 
Land and Buildings 103 
Important Factors to be Considered 104 
Two Methods Used in Charging Off 105 

XX. Burden and Expense Distribution . 107 

Four Methods Used 108 

XXI. Percentage to Direct Wage Burden 

Distribution Ill 

Description of Main Points of This Method 112 
Weakness of Plan 113 



XIV 



CONTENTS 



Chapter 

XXII. Direct Labor Hour Burden Distribu- 



tion 



Application and Limitations 115, 116 
Development of Standard Rate per Hour 
Bonus Paid Foremen 117 



116 



Page 



115 



XXIII. Machine Hour Burden Distribution 
— Old Plan 



Proportionate Differences in Burden Costs 
Two Distribution Plans 119 
Example of Primitive Machine Rate Plan 
Troublesome Complications 121 



118 



120 



XXIV. Machine Hour Burden Distribution 
— Modern Plan .... 



How It Is Applied 123, 124 

Best Adapted for Continuous Operations 



127 



Popularity Due to Simplicity 128 
An Important Advantage of the Plan 
Where It Works Best 132 



130 



118 



124 



XXV. Burden Distribution on Materials . 128 



XXVI. Choosing the Burden Distribution 

Plan 133 



Accuracy Tempered by Practicability 
Two Fundamental Purposes 135 
Summary of Plans 137 



134 



XXVII. Cost Data Collection and Prepara- 
tion 138 



Use of Charts 139 
Preparing Data in Advance 



143 



XXVIII. Cost Statements and Records 

An Interesting Comparison 144 
Making Cost Statements Inspirational 146 
Valuable Data Not Used by Executives 147 
Data for Comparison on Expense Items 148 



144 



CONTENTS 



xv 



Chapter 

XXIX. Getting Statements Out on Time 

Eliminate Duplication in Collection of Data 151 
Making Schedule and Chart 152 
The Use of Mechanical Devices 154 



Page 
150 



XXX. Symbols as an Aid 157 



Mnemonic 157 
Numerical or Alphabetical 
Combination System 159 



158 



XXXI. Graphic Presentation 



161 



Graphs Facilitate Comparisons 162 
Obviating Disclosure of Actual Figures 163 
Suggestions for Use of Graphs 164 

XXXII. The Cost Department Organization 166 

Two Extremes to be Guarded Against 167 
Availability of Data Important 168 

XXXIII. The Cost Accountant .... 170 

Necessary Qualifications 170-172 

XXXIV. Relation Between Cost and Effi- 

ciency Departments . . .173 

Functions of These Two Departments 173 
Distinction in Results Obtained 174 



XXXV. Use of Costs for Control . . . 176 

Four Principal Uses of Cost Data 176 
The '"Why" of Some Business Failures 183 
Estimating Production 184 

XXXVI. Use of Costs for Standardization . 188 

Proper Appreciation 188 

How to Start 190 

Establishing and Maintaining Standards 192 



XVI 



CONTENTS 



Chapter Page 

XXXVII. Use of Costs for Financial Purposes 196 

Three Special Purposes 196 

The Effect of Investments on Costs 198 

XXXVIII. Use of Costs for Pricing and Sales . 201 

Haphazard Fixing of Prices 202 

A Safeguard on Fluctuating Markets 203 

A Duty to the Public 205 

XXXIX. The Effect of Cost Data on the 

Labor Problem .... 208 

A Definite Influence 208 

An Important Factor in Making Decisions 209 

The Worker's Reaction 212 

XL. Getting the Co-operative Spirit 

through Costs .... 215 

Education of Executives and Workers 215 
The Dissemination of Cost Data Promotes Con- 
fidence 216 
The Effect of Extravagant Management 218 

XLI. Forms 222 

Forms Merely a Tool, Not a Cost System 223 

Misapplication of Forms 223 

WTien to Design Forms 224 

Simplicity, Size and Shape Important 226 

Standardization of Forms an Economy 228 



XLIL Cost Tests 



230 



Two Factors to be Considered 231 
When to Use Graphs 231 
Standardization Facilitates Comparisons 234 
Permanency the Essential Qualification 235 



COSTS 

THEIR COMPILATION AND 
USE IN MANAGEMENT 



CHAPTER I 

THE COST FACTOR IN MANAGEMENT 

ALL industrial and commercial activities are 
based in the final analysis, on that one all- 
important act of man-decision. The manu- 
facturer decides to produce a certain article and 
then at what price it shall be sold. He decides to use 
in its production certain commodities and, further, 
to manufacture it on certain machines. The dealer 
decides to sell a certain article at a certain price; 
the purchaser decides to buy it at that price. The 
employer decides to hire an individual and pay 
him a certain wage; the worker decides to work 
for him at that rate of wages. The storekeeper 
decides the amount of material to purchase and 
the proper time to buy it. Under scientific man- 
agement we find the specialist who decides the 
exact methods to be followed in each operation in 
the production and distribution of the product. 

No matter what is manufactured or sold, nor 
how, some one must make a decision at some time 

17 



18 COSTS 



affecting each act performed. The success of the 
business or industry depends upon how shrewdly, 
intelligently and carefully these decisions are made. 
Their effect is far-reaching. They make or break 
an organization or an individual. 

Decisions are usually made with one of the six 
following aids: 

1. Intuition 4. Snap Judgment 

2. Experience 5. Habit 

3. Impulse 6. Analysis 

Intuition is defined as ' 'complete and direct 
apprehension without reasoning." The fact that 
reasoning is not included in this action should 
alone point out its instability and unreliability as 
an aid in making decisions. It is certainly not 
dependable in these days of intensive business 
building when there is no time to wait for that 
psychic moment of intuitional inspiration. 

Experience as an aid in making decisions would 
be satisfactory if the experience were always com- 
plete, detailed and accurate as to the point to be 
decided and all matters pertaining to it. It is 
valuable, therefore, only in the proportion that it 
completely meets these requirements. Experience 
is depended upon more than is necessary or wise 
in making decisions. 

Impulsive decisions would be successful if the 
impulses were all in the right direction. It seems 
hardly necessary to point out that this is not true 



COSTS 19 



in the majority of cases. The very nature of this 
method of deciding points makes it unreliable and 
therefore unsatisfactory. 

Snap judgment is usually resorted to for want of 
time to consider carefully everything having a 
bearing on the point to be decided. Like many 
other things done in haste, it is often repented at 
leisure. 

Making a decision in a certain way from habit 
may be wise, if the habitual method has proved to 
be the best in all circumstances. Here the danger 
lies in the fact that the best possible action may 
not have been discovered before the development 
of the habit. It is well at least to check up such 
habitual decisions from time to time to see 
whether or not there is room for improvement. 

We now come to the sixth and last aid in making 
decisions — analysis. This is the most consistently 
effective and successful basis of them all. It in- 
cludes the complete investigation of all information 
pertaining to the point in question, and all related 
points, and the thorough analysis of all data at 
hand. This data should be complete, detailed, 
accessible, accurate and up-to-date enough to be of 
assistance in making prompt decisions based upon 
a knowledge of previous conditions and possible 
future effects. 

If the money losses in business caused by the 
employment of unintelligent and unreliable aids in 
making decisions were totaled in a lump sum, their 
amount would be staggering. There can be little 



20 COSTS 

doubt that a great majority of the business failures 
reported by Bradstreet are traceable to this lack of 
investigation and analysis in deciding vital points. 

Cost data, and particularly operating cost data, 
are a valuable aid in making decisions. There is 
hardly a decision made which is not directly or 
indirectly affected by costs and does not directly 
or indirectly affect costs in turn. A careful analy- 
sis of present and past cost conditions of any 
operation, item or factor in production should 
certainly assist by pointing out accurately, as 
nothing else can do, the effect of the continuation 
of present practices and policies, of a change in 
them or of the development of entirely new prac- 
tices or policies. 

Operating cost data are available for this purpose 
if they have been correctly collected and recorded. 

We do not wish to be understood as advocating 
a new and complete investigation each time a 
decision, no matter how trivial, is made. We do 
insist, however, that all important decisions can 
best be made only after a careful analysis of all 
the information available. 

Minor decisions, arising frequently, should be 
based upon general policies which have been deter- 
mined periodically after the same careful and 
thorough investigation and analysis of available 
information. This determination of policies for 
guidance in making decisions is the real work of 
standardization which makes for efficiency. 



COSTS 21 

We wish also to emphasize that no cost account- 
ing plan is complete unless all information is col- 
lected and arranged so that it may be put to im- 
mediate use in making these decisions and deter- 
mining these policies. The data collected must be 
complete and sufficient as to present and past 
practices, so that possible future results can be 
quickly and accurately estimated. This informa- 
tion need not all be tabulated currently in state- 
ment form, but it should always be available for 
easy tabulation when it is needed. 



CHAPTER II 

COSTS DURING PROSPEROUS PERIODS 

WHEN the production of your plant under 
prosperous conditions seems to have 
reached its limit and you are asked what 
additional demand you can take care of during the 
next one, two or six months, are you in position to 
give an intelligent reply, based on facts and records 
of past performance which you know you can 
live up to? 

When the acceptance of a large order involving 
a considerable margin of profit depends entirely on 
your statement as to whether or not you can make 
the necessary delivery, can you conscientiously 
and quickly make the decision, without feeling in 
the future, if you decide in the negative, that you 
may have unwisely turned away some very good 
business, or without feeling a gnawing worry, if 
you decide in the affirmative, as to how you are 
going to make good on a very hasty, although well- 
intentioned, promise? 

When the question of more machinery, more 
equipment, more space or more buildings arises, 

22 



COSTS 23 



are you able to correctly and definitely decide how 
much and what kind of equipment you need and 
can work to the best advantage, or how much 
additional space can be advantageously used and 
what size and design of building will fill the new 
requirements? Can you do this with a certainty 
that these investments can be afforded; that you 
will be able to utilize them to such an extent that 
the depreciation and interest on the investments 
will be paid for in additional business, and that 
these items will not become an unearned burden 
in the future when business conditions are not so 
good? Do you know just how far you can go? 

When your foreman wants more men, how do 
you know that he needs the number and kind he 
asks for? Are you sure just which sections need 
additional help? Do you know how many burden 
men can be added without making the burden top- 
heavy? Do you know whether or not it will pay 
to add to your organization? 

If the source of supply of certain materials used 
in your production is temporarily or permanently 
stopped, and the use of substitute material will 
make necessary changes in processing which will 
affect your costs, can you readily tell just to what 
extent they will be affected? 

It is, of course, understood that in order to make 
all these decisions wisely and intelligently, it is 
necessary to provide a correct organization, stand- 
ardization of operations, methods, materials and 
equipment, and suitable and sufficient equipment 



9A COSTS 



and facilities, but we wish to suggest that all these 
are not enough without adequate and complete 
operating cost statements. 

We would suggest that this prosperous condition 
of a business offers many temptations to the execu- 
tive in charge, not only to disregard the assistance 
offered him by cost statements, but to believe them 
a hindrance. 

He is being pressed for more production. The 
sales department cries: "Get out more work. 
We can sell it." Profits are large, at least larger 
than they were, and the policy very easily resolves 
itself into one of "production at any price." The 
executive may be so busy following the many other 
important details of his plant necessary for this 
increased business, that he may soon believe that 
the cost statements which are laid on his desk are a 
nuisance, and barely looks at them. His more 
important work is to get men and buildings, buy 
more machinery and increase the capacity of his 
plant generally. In other words he is extremely 
busy spending money. 

Several striking lessons which can be learned 
from such conditions will prove that the use of 
operating cost data is more necessary and valuable 
than ever before, and that it is good business. 

In the first place, why should any good business 
organization be willing to let any portion of these 
extra profits during profitable times be wasted? 
Such money should be conserved in a fund to carry 
the business over periods when business is poor 



COSTS 25 

and profits small or not there at all. Not to do so 
is to class oneself with the man who, when money 
is plentiful, when he is "flush" in other words, 
extravagantly throws his money away for unneces- 
sary things which probably do him more harm 
than good. Yet there is a striking resemblance 
to this case when, under prosperous conditions, a 
business dissipates its extra profits in wastes which 
would be unnecessary if someone in the organiza- 
tion took the interest and the time to watch each 
expenditure as carefully as it would be watched 
were conditions not so good and were economy the 
order of the day. 

This extravagance in expenditure becomes a 
habit with a business organization and tends to 
demoralize it just as readily as it does an individ- 
ual. Its ill effects will be felt long after the 
prosperous periods have come to an end, and 
especially when depressions come. 

Another point to be remembered is that as the 
operating expenses for labor, burden and supplies 
legitimately increase there is opportunity for 
greater total amounts — as well as a tendency for 
a larger percentage of waste to expense — to be 
wasted, or saved by careful use of costs. 

When such conditions occur and a great deal of 
energy is exerted in spending money, there should 
be a strong element in the organization at work 
studying all factors, with the idea of saving a part 
of it and eliminating inefficiencies. This influence 
should be stronger, if anything, than ever before, 



COSTS 



and might be brought to bear through additional 
executive control or through a betterment or 
efficiency manager or staff. 

Cost statements should, if anything, be more 
promptly available for study and analysis. They 
should be studied with more interest, since they 
represent larger expenditures made under more 
difficult conditions. 

The application of the principle of standard 
normal burden rates offers particular advantages 
during prosperous periods. If burden rates have 
been established and charged as they should be on 
a basis of normal operation, and the burden is 
properly watched and kept down with the aid of 
detailed cost statements, the results should of 
course be, with an increase in the number of units 
produced, a larger total of burden accounted for 
than is actually spent. This surplus, actually a 
profit, should be kept as a reserve to make up for 
deficits under less prosperous conditions. 

In this way a more stable basis of operation is 
established and a record is provided which will 
serve to indicate how successfully the management 
is watching the rise and fall of burden expenses in 
proportion to production and earnings. 



CHAPTER III 

COSTS DURING DEPRESSIONS 

WHEN the demand for production decreases, 
direct production costs can be decreased, 
to a certain extent at least, in proportion 
to production requirement. Materials need not 
be purchased unless the product for which they 
are intended can be sold. Workmen need not be 
employed unless there is reasonable assurance that 
their production will be disposed of. But what of 
the majority of items of burden expenses? Can 
they be decreased? How shall we take care of idle 
machinery? 

If burden cannot be decreased, and relentlessly 
continues regardless of the amount of production, 
it becomes an ever-increasing proportion of the 
total cost and usually a higher unit cost is the 
result. The total burden must be charged to 
something, and if the number of units manu- 
factured is smaller, each unit must carry a larger 
amount of the total burden. To increase the cost 
and necessarily the price is, of course, very unde- 
sirable, especially at a time such as we are con- 
sidering, when it is difficult enough to secure 

27 



28 COSTS 

business at the original prices. And so the problem 
becomes more and more complicated. 

Complicated as this problem is to the company 
that knows exactly what effect decreased produc- 
tion and sales have on its costs, how much more 
complicated must it be to those companies which 
do not know accurately the amount of their 
burden, how it is classified, its proportion to direct 
costs and to units produced; those companies 
which, in short, have no dependable cost data. 
There remains nothing for them to do but to take 
chances in the dark. 

Is it, then, surprising that so many disasters 
occur when such concerns attempt without chart 
or compass to sail the troubled sea of business 
upon which even the best equipped business bark 
finds it difficult to navigate? 

The least an industrial organization should do 
under such business conditions is to positively 
ascertain whether or not its cost data are accurate, 
what total burden is carried, of what items it con- 
sists, how it is distributed, and whether or not its 
plan of burden distribution is the best available. 

There is no doubt that a period of business 
depression puts a method of burden distribution 
to a most severe test. This is proper because, as 
we suggested before, it becomes an especially 
important factor. We regret, however, that the 
tendency of many executives is either to neglect 
to refer to a plan of distribution or to brand it as 
inaccurate merely because it tells facts which are 



COSTS 29 

unwelcome. Herein should lie its value — that it 
does tell the facts. 

We believe there is a tendency among many 
managers and executives to fail to recognize suf- 
ficiently that there are at least two fundamental 
purposes in collecting cost data, and especially 
burden expenses. These fundamental purposes 
are: 

1. The control and reduction of costs 

2. The study of price. 

First of all, cost data should tell true costs and 
should not be used for setting selling prices until 
they do so. 

If these two purposes of making burden distri- 
butions are recognized, we should above all be 
honest with ourselves and should not attempt to 
disregard or change a method which tells the truth 
under prosperous conditions, just because we find 
under less prosperous conditions that that truth is 
unwelcome. If the method is right and serves 
these purposes under any condition, it should be 
right under all conditions; otherwise it is not stand- 
ing the test. 

Therefore, let us have truth first, and under all 
conditions let there be no variance from the method 
which tells the truth merely to make matters 
seem more agreeable on the surface. We should, 
if anything, study it all the harder because it 
gives us correct information, and should make 



30 COSTS 



every possible use of it in keeping costs down and 
prices right. 

To set the selling price it is of course necessary 
to consider many other factors beside the cost. In 
setting this price under various conditions of the 
trade, study is needed and good judgment must be 
exercised. Having a true cost, which is unvary- 
ingly accurate, we at least know in setting the 
selling price when we are taking chances of loss. 

The correct method must, therefore, give true 
cost under all conditions so that it designates 
immediately and exactly the loss or profit at any 
price we set. It must never allow us to juggle the 
figures so that they seem to show anything we 
want them to show. 

There is another lesson to be drawn from 
strained business and trade conditions. Too often 
do many companies increase prices to take care of 
increased unit burden costs when a study of this 
burden and the items that go to make it up would 
point out possible reductions in its total and make 
such increases in price unnecessary. In other 
words, they try to make up losses from the outside 
rather than from the inside. An internal study 
should be made first, and here again the burden 
classification and distribution, if they are properly 
made, become very important and valuable. 

If an internal study were consistently made, 
losses during poor business seasons might be made 
up by extra profits during good seasons when 
operating under the decreased burden total 



COSTS 31 

brought about by the "house cleaning" such study 
developed. 

In other words, if proper advantage were taken 
of the extensive study which should go hand in 
hand with periods of business depressions to de- 
crease operating costs, such periods might become 
valuable rather than destructive, teaching a lesson 
which, if properly accepted, would permit the 
reaping of greater profits under normal business 
and trade conditions. 

As indicated in the last chapter, the application 
of burden rates established on a basis of normal 
operation and applied under all conditions, serves 
to provide a reserve after a period of greater pro- 
duction, to make up for deficits in burden earned 
occurring during less prosperous conditions, and in 
this way provides a more stable basis for operation. 

However, the existence of this reserve is no 
excuse for any less energetic study of burden 
reduction, since it really represents profit so long 
as it is not absorbed during dull periods. The 
period of depression should take care of itself as 
long as possible, with resort to a reserve estab- 
lished during prosperous times only as a final 
expediency in order to keep conditions stable. 



CHAPTER IV 

CO-OPERATION ON COST METHODS 

THERE is certainly great significance in the 
statements of Edward N. Hurley, formerly 
chairman of the Federal Trade Commission, 
when he addressed the Ohio Bankers' Association 
at Columbus, and, among other things, recom- 
mended that one of the most important means of 
strengthening American industry to meet Euro- 
pean competition after the war was the establish- 
ment of cost systems. 

Mr. Hurley stated that nine-tenths of the con- 
cerns reporting to the Federal Trade Commission 
do not keep adequate cost systems and that fully 
one-half of the 60,000 corporations that report an 
annual income of $5,000 or over, do not charge 
off a single penny for depreciation. 

He said also that the Trade Commission was 
prepared to send experts to assist trade associa- 
tions in adopting sound systems. 

These statements are important: first, because 
both certainly indicate the need of attention to 
this phase of executive control, and second, and 

.32 



COSTS 33 



more especially, because the last statement offers 
a definite solution. 

It is a long step forward when the United States 
Government prepares itself to co-operate with 
industry in groups in such a matter as the stand- 
ardization of cost methods. It will be a still 
greater step forward when industry prepares itself 
to accept this assistance from the Government. 

The greatest good will result from the general 
consideration of this matter by groups in each 
industry. In that way one company will assist 
another, and, finally, allied groups will co-operate 
with onejinother. 

The one thing which will retard the advance of 
this movement is, no doubt, a misunderstanding 
of the results to be obtained. 

Many executives and companies may hesitate 
to join in this study of cost methods through a 
feeling that a study of costs must include a con- 
sideration of actual cost figures, which they would 
not be ready to divulge. 

This is entirely unnecessary; first, because 
standard methods and systems cannot in any case 
be based upon figures, but must be the result of 
logical conclusions based upon experience and the 
development of principles; and second, because 
it will be noted that Mr. Hurley emphasizes sys- 
tems and methods. It is, of course, obvious that a 
government, the legislation of which forbids it, 
could not encourage price fixing in any sense. 

We are hoping that manufacturers will study 



34 COSTS 



this phase of cost accounting with an appreciation 
that cost finding and price determination are two 
separate, distinct functions, the first being merely 
a basis for the second. Further, that cost methods 
and actual cost figures are entirely separable, the 
latter being merely the result of the execution of 
the plan outlined in the former. 

It is in the development of this basis for securing 
cost figures that the co-operation of industrial 
groups will be so valuable. 

Take for instance depreciation, which as Mr. 
Hurley pointed out, is so much neglected: there 
can be no doubt as to the value of the discussion 
and consideration of this cost factor in a given 
industry. 

The discussion of depreciation must be based 
upon certain experience; the greater the experience 
available, the more intelligent will be the decision. 

The information to be desired will be not how 
much Wm. Brown & Co. charge per unit for 
depreciation, but first, whether or not it is correct 
to include depreciation as a portion of costs; 
second, on what kinds of equipment, building, etc., 
it should be figured; and lastly, from the combined 
experience of the members, what rates of deprecia- 
tion are advisable under various conditions. 

In addition to this, there are several different 
methods of charging depreciation, only one of 
which can be absolutely correct, and it is here that 
not only members of a group, but groups as well, 
can co-operate. 



COSTS 35 



After all these points have been decided upon 
and each manufacturer has based his costs on 
correct methods, we venture to suggest that there 
will still be ample opportunity for competition, 
but it will be a fair competition, an intelligent 
competition, and, what we need above all in these 
United States, a co-operative competition. 

We sincerely hope that manufacturers will 
accept this opportunity to help themselves and 
each other, and that the plans outlined by Mr. 
Hurley may meet with unqualified success. 



CHAPTER V 



ELEMENTS OF COSTS 



EFFICIENCY in its broadest sense is denned 
as the ratio of results obtained to .effort 
expended. Efficiency in its relation to indus- 
trial enterprises may be denned, then, as the ratio 
of production to dollars expended — dollars repre- 
senting wages for labor, cost of material and 
equipment and all other necessary expenditures. 

Science represents knowledge duly arranged and 
systematized, and it follows that the science of 
management must include a complete, accurate 
and systematically arranged knowledge of the 
efficiency of each dollar spent. 

Like all other sciences it is not complete without 
a record of analysis, and a complete and permanent 
record of results of experiments and the effects of 
all varying conditions and changes. 

In the same manner that the science of chemistry 
analyzes chemicals and their uses, and then pre- 
scribes correct combinations for most efficient use, 
so must the science of management analyze the 
use of dollars and prescribe methods for their most 
efficient use. 

36 



COSTS 37 



To fill the need for such records, to give to the 
student of scientific management such methods of 
analysis, and to provide a permanent record of 
experiments and research for future guidance, we 
must have cost statements, records and data. 

It was not so long ago that operating cost state- 
ments were considered a luxury. Hard work, long 
hours, shrewd bargaining and judgment spelled 
success. In these days of intensive competition, 
however, this definition has been changed; judg- 
ment has been largely replaced by scientific analy- 
sis and cost records. 

Operating cost statements are receiving ever- 
increasing attention. They now have a recognized 
value, and will soon be considered indispensable. 

To a failing business they represent a new lease 
on life, pointing out possible retrenchments which 
would never have appeared without them. To a 
prosperous business they constitute a protection, 
warning the management of dangerous policies 
and practices. For the investor and the executive 
they provide a course by which to steer their 
business bark. They insure employees, from the 
manager down, absolute justice and fair dealing, 
inasmuch as snap judgment is replaced by scientific 
analysis, and permanent and accurate records of 
efficiencies, individually and as a body. On 
account of their importance in the work of waste 
reduction they help give the consumer and the 
public at large greater dollar efficiency. 

To manufacture any product we must incur 



38 COSTS 



expenses which may be described as labor, material 
and overhead. As one of the great purposes of an 
operating cost system is to compare costs, it is 
vitally important that an analysis be made of 
every expense to decide its correct place in a com- 
parative statement and to insure a fair comparison 
made on exactly the same basis each day, week, 
month or period. 

The importance of this analysis cannot be over- 
estimated. It is the survey from which is planned 
the foundation of the cost statement, and if it is 
incorrect, incomplete or ambiguous, it will lead to 
innumerable troubles. 

Labor cost is divided into two classes — produc- 
tive, or that spent in actually making the product, 
and non-productive, or that which, although it 
does not actually produce, is necessary for the 
supervision, housing, maintenance and efficiency 
of the labor which does produce. The former 
should be termed direct labor; the latter indirect 
labor. 

In the first class is placed the machine hand, 
who produces so many parts each day; the bench 
hand, who turns out so many pieces an hour; or the 
floor hand, who spends days assembling one com- 
plete machine or bridge. 

In the second class are foremen, crane, hoist or 
derrick operators, tool room attendants, repairmen, 
etc. 

In the analysis of material cost we again find two 
classes. One class, which we will call direct mate- 



COSTS 39 

rial, should contain such material as is used in the 
manufacture of the product. The other class, 
which we will call indirect material, should contain 
such material as is used to assist in the manufacture 
but does not actually go into the product. 

In the former is placed the casting which is 
used in making the finished machine or part, the 
steel beam used in making the bridge, or the wood 
used in making the table. 

In the latter class are placed items used in 
repairing, renewing or maintaining machinery and 
buildings, such as new parts, oils, grease, fuel, light 
globes, crayons, paints for marking and stenciling 
parts. 

In analyzing overhead we have indirect labor, 
indirect material and a number of other expenses 
such as rent, taxes, insurance, depreciation, etc. 
In order to facilitate our comparisons, these 
expenses should be classified according to two divi- 
sions: burden and general expenses. 

Under burden we should have burden labor and 
burden material, directly chargeable to manu- 
facturing, both items controlled by the departmen- 
tal foremen or superintendents, also all fixed 
charges, such as depreciation, rent, insurance, 
which can be directly charged to the plant depart- 
ments or divisions. 

The classification of burden is a large study in 
itself and will be considered more fully later on. 

General expenses should include such items of 
administration, rent, insurance and fixed charges, 



40 COSTS 



as cannot be carried directly to the individual 
departments or divisions. 

It would be impossible to make a classification 
of expenses that would cover all cases, owing to the 
fact that conditions of manufacture have a bearing 
on the correct division of expenses. While some 
items may be classified in a certain division in one 
plant, they may be thrown into a different one 
when studying another case. The classification, 
then, must be original and individual to a certain 
extent in each analysis. 



CHAPTER VI 



LABOR COSTS 



THE WORLD holds no greater resource than 
productive labor, be it manual or mental, 
and yet, in proportion to its value, amaz- 
ingly little is known about it. It would be difficult 
to imagine any product or material that does not 
necessitate the use of labor at some time or another 
up to the time of its ultimate consumption or use, 
yet here again there is a deplorable lack of knowl- 
edge as to the proportionate amount of labor neces- 
sary in the production and distribution of this 
material or product. All of which is simply 
another argument in favor of the collection, re- 
cording and study of data on labor and its relation 
to production, in order that it may be conserved 
and used to its greatest efficiency. 

At the beginning of the scientific study of pro- 
duction, the need for definite and accurate records 
of labor spent was quickly recognized. Hence 
we have the carefully collected labor records and 
data, which, after all, have been developed with 

41 



42 COSTS 



only the best ultimate intentions toward labor for 
its conservation and most effective use. 

Labor costs are important then, if for no other 
reason than that in almost every instance very 
little is really known of the relation between the 
amount spent and the value of the work performed. 
This problem has by no means been successfully 
solved. Unless it comes as a result of the work 
done by George DeA. Babcock, in the develop- 
ment of his formula for arriving at the value per 
hour of labor performed by various workers under 
different conditions, we know of no rule which can 
be applied in each and every case to tell us what 
our labor costs should be and will be under various 
changing conditions of business. 

Even in the highly standardized organizations, 
and there are at present proportionately few such, 
where standards have been established covering 
all direct or what is commonly known as produc- 
tive labor and where the cost of increased produc- 
tion can be estimated more or less correctly by the 
application of these standards, there still remains 
the problem of indirect or burden labor. 

How much is required and will be required as 
production is increased? Can the present foreman 
or supervising organization handle another group 
of workmen? Equipment upkeep will increase as 
the machines are operated more hours per day. 
But how much? Or new machines may be added 
which will require extra attention and upkeep. As 
business improves and production increases, the 



COSTS 43 



factory floors or store rooms may become con- 
gested and the moving and transferring of material 
may become a difficult problem. More men will 
be required to do this work. But how many? 

Such are the questions which the executive of a 
highly standardized plant must answer when under 
prosperous business conditions and in order to take 
care of greatly increased production requirements, 
he must look ahead and make arrangements to 
increase his working force. 

And the number of these questions is multiplied 
two- and three-fold when there are no standards, 
and every labor hour is an unknown quantity 
varying in value with the man, machine, operation, 
and what not. 

Of course, there is an easy solution, the line of 
least resistance — to hire more men : to maintain a 
force plenty large enough for peak requirements 
even though some men are idle part of the time or are 
entirely unnecessary. The sales and administra- 
tive departments of the organization are optimistic 
and suggest getting and holding plenty of men. 

But is this solution entirely fair? Certainly it is 
unfair to the workman if he is retained only to 
waste part or all of his time and is to be dropped 
again just as soon as production requirements drop. 
The aim should be to give all men continuous em- 
ployment in positions where they can make them- 
selves most valuable and receive the largest return 
for their services. We venture the statement that 
there is productive work enough for all the men in 



44 COSTS 



this country to do if only they were properly dis- 
tributed, and working on the jobs for which they 
were best suited or to which they could be trained 
through continuous employment. 

Obviously this method of taking care of labor 
problems is unfair to the company if it results in 
the waste of time for which good money is being 
paid. Much more might be written here of the 
inefficiencies of organizations with ever-changing 
personnel, and the promiscuous hiring and firing 
of men. 

When considering this problem of labor and 
labor costs, the least we can suggest for guidance 
of the executive are complete records of operating 
costs on all classes of labor, including direct or 
what is commonly called productive labor, as well 
as indirect or burden labor. They should cover as 
many different conditions as possible and should be 
classified completely enough so that the executive 
could assume such hypothetical conditions as the 
future might bring, and estimate what labor costs 
would result from the various alternative solutions 
which he might apply. Even where standards 
have been developed, such records should be avail- 
able to show whether or not the standards had 
been attained and maintained under various 
conditions. 

If a graph is drawn showing by one line the 
increase and decrease of payrolls, and by another 
line the increase and decrease of production, unless 
it is in a period of standardization, usually it will 



COSTS 45 



be found that the payroll line increases more 
rapidly than the production line and decreases 
more slowly. This is, of course, logical and neces- 
sary to a certain extent, but the nearer these two 
lines can be kept parallel, the better. A chart of 
this kind may be found of interest to many an 
executive. 



CHAPTER VII 

CLASSIFICATION OF DIRECT LABOR COSTS 

ALL EXPENDITURES of labor are divided 
into two broad and natural classifications. 
The first contains all labor items covering 
work done to produce, construct or handle salable 
products and materials, the nature and manner of 
handling of which is such as to make it possible to 
measure and record it accurately and definitely 
against the recognized and satisfactory units of 
manufacture or sale of the products- or materials to 
which it applies. These units represent either 
time, or materials, or combinations of these two. 

The second class contains all items covering work 
which is not definitely measurable against the 
above mentioned units, being necessary for pro- 
duction only in relation to direct effort, and cover- 
ing, as it should, the supervision, housing, main- 
tenance and efficiency of that labor as a whole. 

These two classes are often described as produc- 
tive and non-productive respectively. This ter- 
minology is misleading, since all activities to 
become labor must be productive, and labor des- 

46 



COSTS 47 



cribed as belonging to the second class is after all 
every bit as productive as that in the first class. 
A better description will be found in the names 
"direct" and "indirect," inasmuch as the labor 
specified in the first class may be charged directly 
to production, and that in the second class but 
indirectly. 

Direct labor may be described as the labor which 
is accurately and definitely measurable against 
the recognized units of the product or material to 
which it applies. In classifying and recording this 
labor, the first step is to describe just what these 
units are to be. It might be well to suggest here 
that the more minute the units recorded, the more 
useful the record. The most useful record would 
be one which showed the exact labor expended in 
each move of a given corporation on a product, 
exactly as is done in time and motion study. This 
is, of course, impractical as a permanent detail, as 
they can be recorded only at intervals in the same 
motion study. Units must be found, then, which 
are small enough to be properly descriptive and 
useful, and on which the time expended is long 
enough to make it practical, with an allowable 
amount of detail work to record it accurately. 

In the following list will be found eight different 
headings under which direct labor is usually 
classified. It is almost always necessary to 
collect data according to several of them, and in 



48 COSTS 



many cases it may be desirable to use them all. 
These eight units are: 

1. Men 

2. Operations 

3. Machines 

4. Materials or Products 

5. Departments or Divisions 

6. Orders or Contracts 

7. Units of Commodity 

8. Lots of Commodity. 

In deciding upon this most important point it 
will be well to keep in mind the five most impor- 
tant uses of the records which are to be made as 
follows : 



1. 


Control 


4. 


Determining Standards 


2. 


Decisions 


5. 


Future Estimates. 


3. 


Reductions 







We have then two kinds of labor, direct and 
indirect, measurable against either material dr 
product used or service provided, in terms of 
hours. For analysis and use we have eight possible 
headings under which to classify direct labor, and 
in establishing our classifications, we should satisfy 
five possible uses of the data. 

Here we have a combination of factors and 
variables worthy of much study before the final 
classification is established. It should not be 
passed over lightly. This classification is usually 
the very foundation of the entire cost plan. 



CHAPTER VIII 

CLASSIFICATION OF INDIRECT LABOR COSTS 

WE HAVE described indirect labor as that 
which is not definitely or accurately 
measurable against the satisfactory and 
recognized units of manufacture or sale of the 
products or materials to which it applies, but 
which is necessary for production only in relation 
to direct effort, and covers the supervision, hous- 
ing, maintenance and efficiency of that labor. 

The very nature of direct labor makes indis- 
pensable in all cases some more or less complete 
classifications, even where no attempt is made to 
analyze the results or use them for other than 
absolutely necessary purposes. For instance, it is 
nearly always necessary to classify this labor 
against materials, products, operations, orders or 
contracts in order to determine prices, make 
estimates, or pay premium or piece rates. Unfor- 
tunately this is not true of indirect labor, inasmuch 
as it is usually added as a total lump sum per- 
centage. 

Classifications of indirect labor are usually con- 
sidered unnecessary until an analysis and study of 

49 



50 COSTS 



it is commenced for reduction, decision or control. 
When it is considered, however, that indirect labor 
may, and usually does, amount in total to as much 
as direct labor, often to twice or three times as 
much, it will be readily seen that the classification, 
study and analysis of this expense should begin 
as soon as that of direct labor. 

A logical consideration of just which items of 
labor expense make up the indirect labor total will 
readily suggest at least a general or main classi- 
fication. 

First, we find that class which is necessary for 
the education, discipline, efficiency, safety and 
supervision of direct labor. This gives us our main 
classification — Supervision. 

Second, there is the class of labor necessary to 
serve the direct workers, supplying assistance in 
moving materials and the like. Here we have 
our second classification — Service. 

Third, it is usually necessary, although there 
may be exceptions, to expend some labor installing 
and maintaining heating, lighting and power 
equipment. This provides the third main classi- 
fication — Heat, Light and Power. 

Fourth, machines, equipment and tools will 
require a maintenance, repairs and renewals. 
Here is found a fourth main classification — 
Maintenance. 

Fifth, it is often found necessary, under certain 
conditions, to expend labor on the maintenance, 
repairs and upkeep of^the buildings and grounds in 



COSTS 51 



which the labor or plant is housed and located. 
Where this is true, a fourth main classification is 
provided — Rent. 

We have, then, five main classifications of 
indirect labor as follows: 

1. Supervision 

2. Service 

3. Heat, Light and Power 

4. Maintenance 

5. Rent. 

A further classification and subdivision of these 
five main classifications depends entirely on local 
conditions, and it is possible here only to suggest 
some such subdivisions which might be found 
under ordinary circumstances and arranged for. 

Under the first main division, Supervision, 
further subdivisions may be arranged for to cover 
items such as : Superintendents or foremen, bonus 
when paid for on an average efficiency basis, safety 
workers, timekeepers, and inspectors. 

Under the second classification, Service, classi- 
fications can be made further to cover crane or 
derrick operators, transfer and move men, elevator 
operators and watchmen. 

The third main classification, Heat, Light and 
Power, can be subdivided to cover engineers, fire- 
men, coal unloaders, wire and line electricians. 

Under the fourth main classification, Mainte- 
nance, can be placed maintenance labor, or oiling 



52 COSTS 



and wiping, repairs or renewals and tool room 
charges. 

The fifth main division, Rent, might be arranged 
to provide subdivisions for building repair men, 
porters, window cleaners, etc. 

It will always be found best to localize and 
classify indirect labor further against departments 
or divisions, against machines or equipment, opera- 
tions or commodity. 

The chief control of indirect labor expense will 
be secured from comparisons. It is absolutely 
essential, therefore, that a definite division or 
classification be made for each and every item of 
this expense and that once having been made, it 
be allowed to remain in this division as long as 
possible. 

Valuable comparisons cannot be secured if an 
item is charged to one account one month and to 
another the next. To guard against this, written 
instructions should be provided describing the 
classifications of this expense, and showing to 
which of these classifications the various kinds of 
indirect labor are chargeable. 

In collecting and recording indirect labor items, 
it will be found desirable to provide mnemonic 
or suggestive symbols for each classification or 
account and to collect and record these items 
against such symbols in exactly the same manner 
as direct labor is collected and recorded against 
its units or divisions. 

It may be found necessary in some cases to make 



COSTS 53 



certain arbitrary distributions of some items of 
indirect labor, where it is impossible to record 
them otherwise. This practice should be avoided 
as much as possible, and whenever necessary 
should be done with only the best study, judgment 
and counsel, and when finally arranged for should 
be clearly defined in written instructions. 



CHAPTER IX 



COLLECTION AND RECORDING OF LABOR COSTS 



A 



NY METHOD, system or device used in the 
collection and recording of labor costs to 
obtain the best results must be: 



1. Accurate as to records furnished 

2. Immediate and prompt in performance 

3. Simple in operation 

4. Definite in action 

5. Rapid in execution. 

In devising and developing a system of recording 
operating cost data, the first consideration should 
be accuracy. When accuracy has been assured, all 
other features may be worked out. In no case 
should accuracy be allowed to give place to or be 
allowed to suffer on account of any of the other 
essentials mentioned. Labor cost is usually used 
as a basis for other distributions and for this 
reason, if for no other, must be especially accurate. 

This is by no means an easy matter in all cases. 
There are conditions under which all other data 
are correctly recorded by very good bookkeeping, 

54 



COSTS 55 



accounting and stores systems, but under which the 
labor cost figures, used as a basis for charging 
these data, are found to be uncertain and indefinite. 

All records of labor operation should be made 
promptly and immediately after they occur. 
Memory should never be depended upon for these 
records, as it will be incorrect in the majority of 
cases. The sooner the record is available after 
the operation is performed the more easily, pro- 
ductively and satisfactorily it can be studied. 

Simplicity will do much toward insuring accur- 
acy. It will make the work more easily under- 
stood, and will reduce the cost of the labor involved 
in collecting these records. As many details 
should be eliminated as possible. 

Every detail necessary to this work should be 
clearly defined as to action and meaning, so as to 
minimize misunderstandings and confusion, and 
leave as little as possible to individual judgment. 
Standard instructions should be written covering 
the methods to be used after they have been 
developed. These will be useful for reference. 

A periodical check or audit should also be made 
to ascertain whether or not these instructions are 
being followed. It is surprising to note how easily 
and rapidly little changes, usually with bad effects, 
will unconsciously be made in the routine of this 
work. 

The execution of the work should be rapid, and 
it will be if it is immediately and promptly done 
by simple and clearly defined methods. 



56 COSTS 



Conditions vary. Consequently the correct 
method will vary. No one system can be said to 
suit all cases. There are, however, certain prac- 
tices which may be considered unsatisfactory in all 
cases, a few of which will be described. 

No attempt will be made to discuss here the 
many different mechanical devices that are used in 
connection with this work. They are no doubt 
helpful and should be used wherever required. 

Perhaps the most universally used and safest 
method to secure a check on labor costs is to make 
two records, one showing the total daily hours of 
each man, and the other distributing these hours 
according to orders, operations and the various 
classifications desired. These two records should, 
of course, check one against the other. 

The first record has been made by various check 
systems controlled by timekeepers, but so many 
satisfactory mechanical and electrical time clocks 
have been developed that at present the majority 
o( such records are made by each workman himself 
on a clock, and afterward calculated by clerks 
who use this record for checking purposes. 

A great diversity is noticed, however, in the 
methods employed to make the second and possi- 
bly the most important record which distributes 
the labor paid for to the various classifications 
desired. Some of the methods used are: 

1. To have the workmen write a report at the 
end of the day or week. 

2. To have foremen make such report. 



COSTS 57 

3. To employ a timekeeper who goes to the 
various men and secures a record of operations 
from them. 

4. To have the workmen record the time on a 
time clock or stamp in a centrally located office or 
at a desk. 

5. To have the workmen report in a centrally 
located office each time they change their work to 
a clerk whose duty it is to make all necessary 
records, either with or without the aid of timing 
devices. 

To ask a man to remember and report on his 
work and division of time after a week or even a 
day has elapsed, at once invites numerous inac- 
curacies and produces a very uncertain record. 
Even if a man's memory is good, he seldom knows 
the importance of the record and cannot be blamed 
if it is incorrect. It requires much of his time to 
keep account of his many changes, and allows a 
certain amount of "fixing" of this report of his 
efficiency to creep in if he is so inclined. 

The foreman reporting the time of an average 
number of men will spend so much time doing it 
(and it is generally impossible to do it accurately 
unless he does devote considerable time to it) that 
much of the value of his work as a supervisor and 
educator is lost. In addition to this, he is doing 
work which can certainly be done as well or even 
better by a clerk at a much lower salary. 

A timekeeper going to the workmen, unless to a 
small number whose work is confined to a small 



58 COSTS 



area, will find it impossible to record all their 
changes of work and operations as accurately as 
they should be recorded, inasmuch as he must still 
depend to a certain extent upon reports from the 
various workmen. 

The last two methods in our list and more 
especially the last, have been found to be satis- 
factory, not only for accuracy in recording the 
various changes of work, but because of the fact 
that the record secured can be promptly used in 
developing the dispatching and routing of work 
in a plant. 

Where the last method is used, it has often been 
found desirable to make more than one copy of 
each record, and when the record is complete to 
use these various copies simultaneously for as many 
different necessary purposes as there are copies, 
thus securing immediately and promptly a maxi- 
mum of information ready for use. 



CHAPTER X 

PAYROLL DISTRIBUTION 

MANY EMPLOYERS who pay out large 
sums of money for wages demand a careful 
check on the method of drawing out, 
recording, posting and paying these sums. These 
same employers, however, have an indifferent audit 
or check on the way the money is actually spent 
by the foreman or superintendent, of the amount 
of labor paid for, or the value received for it. 

Just as long as money is held in the form of cur- 
rency or securities, it seems to be considered 
necessary to watch it carefully. Why should it 
become less valuable when invested in labor? 

The executive entrusting the cashier with $100 
to spend for sundries insists on the best possible 
accounting for every cent. At the same time he 
gives his superintendent $10,000 to spend for labor 
and accepts a mediocre report of its use. 

One of the things necessary for a correct account- 
ing in wages is an accurate and detailed payroll 
distribution made as soon as possible after the 
labor is used. It should not be necessary to wait 
until after it is paid for. It seems hardly necessary 

59 



60 COSTS 



to mention the many cases where it is found dif- 
ficult to account for from two to five per cent of 
the total payroll paid. Almost all large wage 
payers have encountered this trouble at one time 
or another. 

A cause of this difficulty is found in the method 
of making a check and distribution after a month's 
time, or even a longer period. The errors or dif- 
ferences cannot be traced in many of these cases 
because no one has time to devote to the large 
amount of work it would require, and because, 
besides, the various transactions have become 
ancient history. The difference is usually charged 
to some item which is found lower than usual, or 
to some large item where it will not be noticed. 

The daily check, then, is the remedy. For this 
a good recording clock or check system is necessary 
to record total daily hours work, as well as an 
equally sure and accurate individual operation or 
job time report. 

Ordinarily, to secure a daily check, the great 
difficulty lies in the large amount of work involved 
in extending daily the total payroll of dollars and 
cents due to the ever changing conditions in force. 
The following suggests a simplified method of 
securing the daily payroll: 

A standard payroll based on all workmen on the 
payroll working for the standard number of hours 
a day is computed. To keep this standard it is 
necessary to add promptly all wages paid to new 
men or given as increases in rates, and to deduct 



COSTS 61 

promptly wages of all men dropped from the pay- 
roll. To secure a certain day's exact payroll, it is 
necessary simply to add to the standard payroll 
all amounts payable for extra or overtime work, 
and to deduct amounts covering late, lost or absent 
hours — in other words to compute the exceptions 
only. 

In cases where piece rates are used, many plants 
have found it decidely advantageous to provide a 
daily statement comparing daily average hourly 
wages earned with standards or normal earnings 
and pointing out significant exceptions either 
high or low. 

The up-to-date executive will find a daily distri- 
bution an invaluable aid in reducing costs, inas- 
much as it gives him an immediate accounting of 
any unnatural occurrences which can be investi- 
gated and remedied before they have gone far. 



CHAPTER XI 



DIRECT MATERIAL COSTS 



FROM THE time materials or products are 
found in their original condition as made by 
Nature, up to the time when they are con- 
sumed or put to their ultimate proper and most 
profitable use, every change, either in physical 
condition or location, is an exhibition and measure- 
ment of man's efforts, efficiency and skill. If for 
no other reason than to aid in the conservation 
and development of these efforts, this efficiency 
and this skill, all accurate knowledge possible 
should be obtained and accumulated as to the pro- 
portionate cost and value of such changes. 

How many managers realize the innumerable 
changes which are occurring daily, in fact, hourly, 
in the cost and value of the materials which they 
handle, store or manufacture? When we remem- 
ber that from the very moment the material is 
purchased, even before it is actually received, up 
to the time when it is sold and shipped, the cost is 
steadily increasing, and the value either increasing 
or decreasing, then we may partially realize how 
interesting and valuable a knowledge of the exact 

62 



COSTS 63 



amounts and proportionate value of these increases 
and decreases may be. 

When material is purchased, new costs are added 
immediately to the original purchase price, for 
handling, freight and transportation charges, inter- 
est, insurance and storage. 

When material is stored, certain decreases in 
value are usually incurred, such as those caused by 
shrinkage, spoilage, obsolescence, defects, wastes 
and seepage. 

When manufacturing commences, a series of 
changes (usually increasing) in the value of the 
material begins, as the result of work done and 
skill applied. 

We might also mention here the increase and 
decrease in values due to market conditions, but 
will not discuss this phase, inasmuch as it has to 
do with economic laws and principles rather than 
industrial endeavors and accomplishments. This 
gambling with markets should not be considered a 
part of manufacturing, and records of such changes 
should not be confused with or be made a portion 
of manufacturing costs, but should always be in- 
dicated separately. 

We will consider in these pages only the classi- 
fication of materials for the collection of costs, 
assuming that all requisite systems, such as proper 
purchasing, receiving and stores accounting, with 
the perpetual inventories, requisitions and order 
forms necessary to go with them, have been 
developed or can easily be originated. 



64 COSTS 



The circumstances which will determine the cor- 
rect classification of material costs in the average 
business may be described in three broad divisions : 

1. The store or warehouse where material is 
simply purchased, stored and shipped without the 
performance of any work on it. 

2. The manufacturing plant where materials are 
manufactured in large lots and put into stock for 
future sale and shipment. 

3. The manufacturing enterprise which manu- 
factures and assembles on order and contract only, 
and which usually contracts for the sale of the 
completed product before it commences to work 
upon the raw material. 

A combination of two or all three of these cir- 
cumstances is often found in one organization. 

In the store or warehouse the classification of 
material costs is comparatively simple. Costs are 
chargeable against classifications of each kind of 
commodity as purchased. Further subdivisions 
under these classifications may be arranged for 
whenever differences in sizes, grades and quality of 
materials make this course practicable. 

Where materials are manufactured and stored 
for future sale, proper stores accounting with 
records showing average requirements, and the 
limits below which replenishment is necessary, 
simplify the entry of orders for lots of either unit 
parts or entire assemblies of the articles manu- 
factured. There are exceptional cases such as 
shipyards where raw materials for such orders are 



COSTS 65 



purchased for each individual lot, and where the 
cost of materials can be charged to the order or 
lot to which it applies as it is received, and can be- 
come a portion of the cost of the finished product. 

If raw materials are bought in large quantities 
and stored for use on such orders, the original cost 
of the materials, plus the cost of transportation, 
storage and handling, is chargeable to the orders 
as they are withdrawn from the stock rooms and 
used. 

This should be done, however, only where these 
items are especially large because of speculative or 
seasonable conditions. 

In arranging for the recording and accounting 
of materials, there are a number of features which 
should be taken into account in order to develop 
proper control. 

For instance, it is very well recognized, although 
not as universally as it should be, that the eco- 
nomical method of purchasing is through con- 
tracting at one time for a supply of a commodity 
to take care of requirements for a long period, say 
six months or a year. 

The record of the use and issuance of the mater- 
ial should therefore be outlined so that the use of 
material can be properly analyzed as to how it 
was used, on what work it was applied, the relative 
quantities over a certain period, the possibility ot 
substitution, reservation of present stock againsf 
orders uncompleted, the reservation of stock to 
cover work on which bids were made and which 



66 COSTS 



would probably be closed, and the tendency of 
future requirements. This record should therefore 
provide a complete picture of present conditions 
as well as prophecy for the future. 

Without it contracts are placed arbitrarily and 
haphazardly, with the result that in some cases 
complete requirements are not provided for and 
extra lots must be purchased at increased prices 
to take care of the shortages, in other cases too 
much material is contracted for, tying up an un- 
necessary investment and, what is sometimes 
worse, filling valuable storage space. 

As an instance of this last condition, one case 
was noted where a supply of a certain bulky mater- 
ial, enough stock to take care of requirements for 
ten years, had been contracted for through lack of 
thorough analysis. This stock took up so much 
space that it made quite impossible the storage of 
regular moving stock without continuous rehand- 
ling at a heavy additional expense. 

It is, of course, hardly necessary to do more than 
mention the effect on production of shortage of 
materials and parts, sometimes even seemingly 
unimportant parts; such shortages can often be 
traced to lack of material records to aid in specify- 
ing, purchasing, and contracting for material 
requirements. 

Records should therefore be provided which 
permit of complete study and form a basis for the 
wise control of this highly important function. 

In order to purchase economically, markets and 



COSTS 67 

prices must be studied and fluctuations carefully 
watched. The tendencies must be followed. Here, 
too, material records should play an important 
part. They should provide a history of price 
changes, purchases, sources of supply, and changes 
by substitution of different sizes or different quali- 
ties. In other words, there should be such records 
of purchase and use as will provide a foundation 
for judgment in economical purchasing. 

The material control should also be developed 
so that it actually does control the consumption or 
use of material and its application on the work or 
orders for which it was intended. It should provide 
means for reserving certain portions of material 
for special orders as soon as they are entered and 
it should provide the means of forcing the use on 
such orders. This does not necessarily mean a 
physical allotment or reservation of the material 
although this is sometimes desirable. 

This control is necessary, first in order to know 
at all times the condition of stock not only as 
issued but as booked in orders. If such bookings 
are not provided for, economical purchase of 
materials needed to fulfill all requirements cannot 
always be made, shortages are not noted until 
they actually occur and delays in production 
naturally follow ; further, it is difficult to make any 
sort of estimate as to what additional orders can 
be accepted and what promises for delivery can 
be made, because there is no record of the quanti- 
ties needed for unfilled or uncompleted orders. 



68 COSTS 



The material control is not complete unless it 
provides for immediate report and proper record 
of receipts. This is a big feature in itself. There 
must be an almost instantaneous tie-up between 
the receiving department, material control and 
production departments. Receipts must be re- 
ported correctly, in detail and promptly, so that 
at all times the stock records represent a complete 
picture of actual stock on hand up to the minute. 
It has been found in many cases that production 
was delayed, workmen idle, and machines shut 
down, presumedly for want of material, when the 
material was actually in the receiving room or, in 
fact, in stock, but did not show on the stock record 
because of lax or incomplete record of receipts. 

Closely allied with the keeping of the receiving 
record is the question of inspections. Inspection 
of materials must be made as promptly as possible 
after receipt, and reports must be immediately 
made. It is, of course, useless to record material 
as received and proceed with arrangements for its 
use only to find the material incorrect in quality, 
design, or kind. Inspection must be reported as 
quickly as possible in order to prevent delay in 
issuance of receiving reports and records of avail- 
able stock. 

Finally, records of waste, spoilage and rejections 
must be provided. These should give an analysis 
of such wastage, indicating causes. They should 
show why and where spoilage occurred, whether in 
use and for what reason, whether because of laxity 



COSTS 69 



or errors in receiving, whether because of certain 
conditions of storage detrimental to the materials 
or parts; they should give, in fact, any details 
which might furnish a clue, too, for the elimination 
of such wastes in the future. In some plants and 
industries this study leads to a complete reorgani- 
zation of methods, to the inauguration of various 
inspection systems, process inspections and the 
like. They are very valuable records. 



CHAPTER XII 

INDIRECT MATERIAL COSTS 

IN APPROACHING the discussion of the col- 
lection and distribution of indirect material 
costs, we wish to emphasize that this particu- 
lar expense is one which is probably most often 
and most easily overlooked and lost control of in 
the average organization; furthermore, that reduc- 
tion of this expense, in the majority of cases, has 
the advantage of being a net saving — a dollar 
earned for each dollar saved. 

By indirect material we mean all materials which 
are used for the supervision, control and main- 
tenance of the plant, buildings, equipment or 
commodity carried or manufactured, and of which 
the period of usefulness is so short that it does not 
permit of charging them as an asset or an invest- 
ment. In no case does this include materials held 
for sale, or upon which it is expected that profit 
may be made. 

Prices remaining the same, it would, of course, be 
most economical to secure such materials from 

70 



COSTS 71 

their source of supply as they are required and 
in neither greater nor less quantity than needed. 
This is impossible, and it is necessary in the major- 
ity of cases to purchase larger quantities than are 
needed for immediate requirements to be held in 
reserve for future use. 

Inasmuch as a large proportion of these mate- 
rials constitute parts and supplies necessary for the 
prompt repair and renewal, as well as mainte- 
nance, of important equipment, and it is vital to 
have such materials available for immediate use, it 
is, therefore, found necessary to carry a more or 
less complete stock of such supplies and parts. 

In the distribution of the cost of these purchases, 
much divergence is noted. In some cases the 
invoices for this material are charged to the general 
merchandise account, and no distinction is made 
between it and the merchandise which is sold for 
profit. Sometimes no further distribution is made, 
and it is expected that the direct materials will 
absorb the cost of the indirect materials in this 
way. It is obvious that with this method the cost 
of such material cannot be studied or analyzed, 
and that control of it is impossible. Where further 
distribution is arranged for, it is often difficult still 
to study these costs, inasmuch as the unaccounted 
for amounts, due to obsolescence, shrinkage, errors 
in stock keeping, etc., are not brought up separate 
from like charges on direct materials, and therefore 
are overlooked and incorrectly disposed of. 

In other cases it is attempted by arbitrary dis- 



72 COSTS 



tribution to charge each invoice for indirect mate- 
rials to the operating and expense accounts. Such 
distribution must be left to the judgment of one 
who supposedly has had long experience and 
knowledge gained from past performance and use 
of this material. This is seldom, if ever, accurate, 
and further, the various departments and accounts 
are charged with this material cost as it is bought 
and paid for, without any reference to when it is 
used, thus making comparisons almost impossible. 
Under these circumstances it is usually found that 
the superintendents or executives to whose depart- 
ments such invoices are charged object strenuously 
to the purchase of more material than is necessary 
for immediate demands, however economical and 
advantageous it may be to so purchase it, since 
this increases their costs beyond all proportion. 

The most satisfactory method for all purposes 
is to provide an account distinct from all others to 
which such invoices may be charged until the 
material is used. The account may be called 
"maintenance supplies," "tools and supplies," 
"supplies" or by any other term which may be 
considered more descriptive. The materials should 
of course be stored in proper store rooms, either 
with or separate from the stock of direct materials, 
preferably separate, and stock records of the most 
approved kind should be kept of each item, show- 
ing complete description, amounts, high and low 
limits, prices, etc. Where this stock is not so ex- 
tensive, it is, of course, possible to modify the 



COSTS 73 

methods in proportion to requirements by placing 
materials of this kind under lock and key in charge 
of the department foreman, who keeps necessary 
records of stock. 

The withdrawal of this material should be only 
through a requisition form. Requisitions should 
be issued and signed only by authorized persons, 
and honored only when so issued and signed. The 
requisition should show beside this signature the 
name or number of the department, workman and 
machine to whom and for which it was issued, and 
should indicate the account chargeable by suggest- 
tive or mnemonic symbols where these are possible. 
This supply requisition should be used to check 
off the issuance of the material it covers on the 
stock records. 

This supply requisition, when priced, becomes 
the charge against the various accounts on the 
cost statement, and for this purpose should be 
recorded and filed so that information may be 
secured at desired periods, and so that at the end 
of the month a total distribution statement for 
the month may be drawn off, showing the amounts 
chargeable to the various accounts, which are used 
to credit the book account, maintenance supplies, 
or other accounts involved. 

In classifying these expenses for use on cost 
statements we find five general divisions which 
should be separately classified wherever possible. 

1. Supervision — to which all such materials as 
are used for administration or supervision of the 



74 COSTS 

department or plant, such as stationery, should be 
charged. 

2. Service — to which materials required for giv- 
ing proper service to all workers and departments 
in order to facilitate their greatest effectiveness 
should be charged. 

3. Heat, Light and Power — to which all mater- 
ials necessary for repairs, renewals, upkeep and 
maintenance of equipment used to furnish heat, 
light or power, should be charged. 

4. Maintenance — to which all materials neces- 
sary for the repairs, renewals, upkeep and main- 
tenance of machinery, tools, and equipment, such 
as repair parts, oil, and waste, should be charged. 

5. Rent — to which all such materials as are re- 
quired for the repairs, renewals, upkeep or main- 
tenance of buildings or grounds, such as new 
flooring and window panes, should be charged. 

Further subdivisions may and should be pro- 
vided to suit the local conditions, so that a study 
as definite as possible may be made of the use of 
this material. For instance, under Maintenance, 
we may separate materials used for repairs and 
renewals, such as machine parts, from that mater- 
ial used for the general maintenance of machines 
and equipment, such as oil, grease and waste. 

It is found advantageous to provide supply 
requisitions in duplicate and triplicate so that they 
may be simultaneously filed according to accounts, 
men or machines. 

The amounts of each commodity used are inter- 



COSTS 75 



esting, and an analysis of this factor often proves 
beneficial. 

In order to secure the co-operation of the work- 
man in the reduction of indirect material costs, it 
will be necessary and advantageous to have definite 
and accurate knowledge as to the amounts used by 
each workman or gang, and for the various ma- 
chines and equipment. It will be found interesting 
to note the effect of a statement, posted or circu- 
lated, showing the amount of this material used by 
the various workmen; it can be arranged so that 
the man who used the most material heads the list, 
and the man who used the least appears at the end. 
In this way the gallon of oil or pound of grease 
becomes dollars and cents, and each withdrawal 
becomes a purchase charged to the men for which 
they will later pay by a higher rating on this com- 
petitive statement. 

It may be also found advantageous to send each 
foreman a copy of all supply requisitions, priced, 
covering the previous day's withdrawals: in other 
words, to bill him for his previous day's purchases. 
He will often find ways of reducing these purchases. 

There is another point which is deemed most 
important in the purchasing of renewals of old 
stocks of indirect material and the addition of new 
stocks. That is the absolute necessity of complete 
control of such purchases. It may be assured by 
requiring the approval of the general superintend- 
ent, works manager or an executive of equal 
ability and authority on all purchases. Foremen 



76 COSTS 



are many times tempted to try new kinds, styles 
and sizes of materials and to do so before old stock 
is completely diminished. Much money may be 
wasted by obsolescence of such stocks or by carry- 
ing a stock of material altogether out of proportion 
in size and variety to real requirements. 



CHAPTER XIII 



BURDEN COSTS 



IGNORANCE as to the amount of and proper 
distribution of burden, as well as of its effects 
on production costs and selling prices, is prob- 
ably one of the greatest hindrances to progress in 
modern business today. It is usually considered 
that burden must be watched with but one pur- 
pose — to reduce it. Where this is true, and where 
there is little or no knowledge as to the effect of 
increases and decreases of burden on total produc- 
tion costs, there is small opportunity for progress 
unless the managment is very optimistic and will- 
ing to take chances, or the margin of profit is very 
large, since most progressive steps involve an 
increase, perhaps only temporarily, in burden 
expenses. 

Often, under scientific management, burden 
increases although there is a positive decrease in 
total unit production cost. One example could be 
cited where doubling the burden lowered the unit 
production cost fifty per cent. Yet burden ex- 
penses are called unproductive. If this is so, what 

77 



78 COSTS 



excuse is there for their existence? They are un- 
productive only when they are unnecessary. 

Do not misunderstand us: not all increases in 
burden expense are justifiable and correct, but 
neither is a decreased $r stationary burden expense 
always indicative that the best results are being 
attained. What we believe essential is an intelli- 
gent control of burden, which can be secured only 
by exact knowledge of the effect of each increase 
or decrease in its amount on the total unit pro- 
duction cost and selling price. 

A very successful manager stated that business 
today suffers from "too much burden." 

This is, no doubt, true in a great number of cases, 
and only emphasizes the fact that many times this 
is due solely to lack of knowledge as to the amount 
of this burden expense, and what individuals or 
factors are responsible for it. It is not logical to 
believe that the brilliant and shrewd master-minds 
which have developed the businesses where such 
ignorance of actual conditions exists would allow 
waste and inefficiencies to continue if they knew 
them. Some will point out that under scientific 
management burden expense often increases. This 
may be true, but it will usually be found where this 
occurs that there is a complete knowledge of the 
amount of such burden increases, and their effect 
upon production. 

Here is the field for the cost accountant. He has 
an important work to do if he will collect and 
classify all expenses so that they are comprehen- 



COSTS 79 



sive, complete, and correct, and may be studied 
and analyzed to help control, correct, and increase 
the efficiency of the organization as a whole. 

Burden expenses may be described as all items 
which are not definitely and accurately measure- 
able against the recognized and satisfactory unit of 
manufacture or sale of the material or product to 
which they apply, but which are absolutely neces- 
sary in order to continue such manufacture and 
sale. 

The burden classification, if correctly made, 
should point out the necessity of each burden 
expense arid relation to and effect upon the direct 
production. 



CHAPTER XIV 

BURDEN CLASSIFICATIONS 

THE PRINCIPAL broad classifications of bur- 
den expenses are as follows: 

1. Indirect Labor 

2. Indirect Material 

3. Fixed Charges 

4. Depreciation 

5. Administrative Expenses 

6. Sales Expenses (when not directly 

chargeable to unit produced). 

Further subdivisions are, of course, possible and 
necessary, and vary somewhat with local condi- 
tions. 

In classifying and subdividing overhead ex- 
penses it should be kept in mind that in order to 
analyze the various items, and decide as to their 
necessity and effect upon cost and production, 
definite lines should be drawn as to the responsi- 
bility for the various items in the organization. 
All expenses should be collected according to 
classifications that define such lines, and should be 
studied with a view to gaining the co-operation of 

80 



COSTS 81 

the responsible factors in controlling those items 
for which they are responsible. Wherever neces- 
sary, organization corrections, combining or sub- 
dividing authority and responsibility should be 
made. 

With this in mind we suggest a subdivision of 
our six main classifications of expense into two 
classes: Burden and General Expenses. 

The first class, Burden, should consist of all 
items for which the executive immediately in 
charge of the operating department is responsible. 
W^here this department is subdivided into two or 
more divisions or departments, classifications 
should be provided to separate those items con- 
trolled or affected by each separate division or 
department, and, in addition, to cover the expenses 
controlled or affected by these departments as a 
whole. 

For instance, where an operating department is 
divided into three separate divisions, each division 
may have its classification of supervision, for 
instance, its particular foreman or executive and 
dispatcher. In addition, it will carry part of the 
expense of a central time keeping cost department 
as well as its share of the salary of a general super- 
intendent or works manager, and, possibly part of 
the cost of an efficiency department. Usually a 
fair distribution of such central office charges can 
be made easily, but should in all cases be separated 
from those items directly controlled by each de- 
partment. 



82 COSTS 



It is often found possible and necessary, in order 
to study and control production correctly, to 
classify and distribute burden expenses to individ- 
ual machines or operations, and in such cases it 
should, of course, be done. 

The second class, General Expense, should con- 
tain those items of expense not controlled or 
affected directly by the executive in charge of the 
operating department, but which are necessary to 
the general administration of the business. They 
are usually derived from the cost of original invest- 
ments and particular equipment and their pro- 
tection against losses, damages or fire. 

Just how the six main classifications of burden 
expense will be divided between these two sub- 
classifications, Burden and General Expense, de- 
pends upon local conditions and the distribution 
of responsibility and authority. 

Whatever this distribution may be, it should 
clearly define the responsibility for each item. No 
items should be lumped under one class as one 
total, which are controlled in part by one section 
of the organization and in part by another sec- 
tion; this opens the door to misunderstandings as 
to the share of responsibility of each individual 
or section. 

It is, of course, often the case that one entire 
item or classification may be equally controlled by 
more than one section or branch of the organiza- 
tion, but all such items should be classified and 
charged so that the responsibility for the total 



COSTS 83 

amount of each classification in the burden distri- 
bution is traceable to some certain division or 
divisions of the organization. 

In many organizations there is a policy against 
giving complete cost information to workers and 
executives and taking them too fully into con- 
fidence. 

If the burden distribution is classified as sug- 
gested above, making it possible to furnish to each 
department and executive only those figures with 
which each is directly concerned and for which 
each is responsible, this objection and difficulty in 
securing co-operation of all concerned in reducing 
costs will be eliminated. 

After the burden classification is decided upon, 
changes should rarely be made since by them com- 
parisons will be made very difficult and in some 
cases impossible. 



CHAPTER XV 



FIXED CHARGES 



FIXED charges are important elements of 
cost often-times neglected in a development 
of burden. These include items which are, 
as their name indicates, a definitely fixed charge 
or rate against the operation of the plant. For 
instance, in this class we find insurance, divided 
under fire, liability and life, certain kinds of taxes, 
and finally rent. 

These items should wherever possible be classi- 
fied so that if measurable against a given depart- 
ment, they can be included in such departmental 
burden rates. For instance, liability insurance can 
be carried direct to the department when based 
upon actual payrolls of the various departments. 
Fire insurance can be distributed when based upon 
valuations. 

Taxes can usually be distributed when based 
upon the proportion of the value in a given depart- 
ment, to the total value used for taxation of all 
departments. 

Rents are, of course, easily apportioned on a 
basis of the space used by the various departments. 

84 



COSTS 85 

All these items should be so classified as to offer 
current comparisons and to show the relative effect 
of these items of costs in the various departmental 
burdens as well as in the general indirect burden. 

They should be classified further under as many 
headings as necessary to keep them distinctive for 
proper comparative purposes. For instance, lia- 
bility insurance may be classified under headings 
which indicate the types of labor covered. By the 
mere classification of labor under these headings 
and the application of the rates of liability insur- 
ance for each class, a reduction in the total amount 
of liability insurance has been found possible. This 
is an item which it will pay most executives to 
study carefully. 

Where heat, light and power are purchased, this 
is often a fixed charge, but it can and should be 
charged direct to the department in order to get 
best comparisons and burden distributions. 

Heat can usually be distributed when based 
upon the area of heated spaces. 

Light can often be metered to each department 
separately, or if not, can be distributed on a basis 
of the wattage of lamps used, and estimation of the 
hours of consumption which, of course, varies by 
seasons and according to hours worked. 

Power can often be metered directly to each 
department. Where this cannot be arranged the 
horse power used by motors in each department, 
proportioned to the horse power used in all depart- 
ments can be estimated and used as a basis. It is 



86 COSTS 



important here to consider as the basis the number 
of hours the various motors are actually in use, 
not the total working hours for all motors. For 
instance some motors are used only one hour each 
day, others for approximately half the time, others 
constantly. This varies by seasons and the basis 
for charging should be changed when the variation 
is very great. 



CHAPTER XVI 

ADMINISTRATIVE AND SELLING EXPENSE 

UNDER administrative expense we come to a 
consideration of the general items of expense 
which, while necessary to the operation of 
the business in general, are not traceable to direct 
cost of the product except under these broad classi- 
fications and distributions. 

This expense includes salaries of executives, 
salaries of office clerks, traveling expenses, office 
supplies and expenses, charities, maintenance and 
cleaning of office buildings, general yards, en- 
trances to plants, etc., watch service, telephone 
and telegraph, printing and stationery, association 
expenses such as memberships in trade organiza- 
tions, local improvement organizations, etc. 

In this class of expense the same rule holds as 
suggested for other types of burden, i.e., that it 
should be classified so that responsibility for the 
various items can be traced to departments and 
individuals with only a minimum classified as 
general. 

These items, too, should be carefully classified 
according to their distinctive nature so that cur- 

87 



88 COSTS 



rent comparisons can be made and any great varia- 
tions can be quickly detected. 

It should always be remembered that this class 
of general expenses offers a field for great reduc- 
tions merely because it can easily become a general 
"burying ground" for all sorts of unaccounted for 
and unclassified items. The ideal classification of 
administrative expenses includes no such account 
as "general" or "miscellaneous," or one in which 
the amounts of such charges each month are small 
enough to be almost negligible. 

The classification of this type of expense, of 
course, varies with local conditions. Each type of 
business naturally offers specific classes by which 
comparisons will be especially valuable. It would 
be impossible for anyone to suggest a classification 
comprehensive enough to cover all purposes. 
However a possible minimum general classification 
of administrative expenses to include the fewest 
divisions possible would be: 

1. Executive Salaries 

2. Clerical Salaries 

3. Stationery and Office Supplies 

4. Rent and Building Maintenance 

5. Telephone and Telegraph 

6. Traveling Expenses 

7. General — including Charities, Dues, etc. 

Selling expense should, of course, be classified 
entirely separate from these general administrative 
and office expenses. Where a chief executive 



COSTS 89 

divides his time between sales activities and general 
administrative functions, proper distributions 
should be made. Traveling expenses, stationery, 
clerical help, salaries of all kinds, telephone and 
telegraph expenses should all be properly distrib- 
uted where applied on selling and kept entirely 
separate from general administrative charges. 
Advertising is, of course, chargeable to selling 
expense alone. 

It is always advocated that selling expense be 
tabulated as a separate and distinct charge. 
However all that has been said of proper classi- 
fication by classes of expense for comparision and 
control purposes, as well as of subdivisions offering 
opportunity for tracing responsibility, holds good 
here as strongly as it does with any other item of 
expense. 

It is valuable, of course, to provide records of 
selling expenses in a way that makes them pro- 
phetic. Provisions should be made to record costs 
of sales by districts, territories, salesmen and classes 
of product. Classifications should indicate the 
comparisons of various kinds of expenses, should 
permit of tabulations of records showing compara- 
tive unit costs and results, and should allow de- 
tailed analysis. 

The distribution of administrative and selling 
expenses as a sur-charge is, of course, different than 
that of plant burden and will be discussed in a 
later chapter. 



CHAPTER XVn 

INTEREST ON INVESTMENT CHARGED AS COST 

PROBABLY no single feature of cost distribu- 
tion and accounting has been debated quite 
so consistently without the development of a 
decision wholly satisfactory to all as the question of 
interest on investment and borrowed capital. 

There are those who claim that it should be 
charged as a definite item of cost, since such 
amounts if invested in bonds or mortgages would 
secure a definite return without time or effort of 
the investor, also that he should receive this 
return for the additional risk assumed in investing 
in a manufacturing enterprise. On the other hand 
there are those who insist that by charging this 
element to cost the manufacturer anticipates earn- 
ings, that he cannot secure profit until the product 
is sold and hence interest is merely a part of profit. 
Whether or not a definite settlement of this 
question will ever be reached is indeed doubtful. 
After a long study of both sides and an analysis 
of arguments coming from the advocates of each 

90 



COSTS 91 



plan, the writer confesses that he is in doubt as to 
whether or not either plan can be recognized as 
best in each and every case, and believes that 
unless some absolutely decisive points are brought 
out we will continue to find both methods used, 
their application being controlled by individual 
circumstances. 

Considered purely from the side of cost control 
there may be one argument of particular interest 
which has not been very extensively recognized in 
favor of the first plan: that by including this item 
in costs it is brought to the attention of the execu- 
tives responsible for costs and hence forces upon 
them a greater appreciation of their responsibility 
to the owners for their money expended. 

In a consideration of this problem we will devote 
this chapter and the next to a statement of argu- 
ments brought out under various conditions re- 
garding both sides of this debated subject. This 
chapter will devote itself to a further discussion of 
the first method. 

In this connection an interesting meeting indeed 
was that of the Western Efficiency Society, when 
a debate was held between that society and the 
Illinois Institute of Accountants on the question, 
"Should Interest on Capital Invested Be Charged 
into Manufacturing Cost?" Each society was 
represented by a team of three members. The 
Western Efficiency Society's team defended the 
question, while the Illinois Institute of Account- 
ants' team opposed it. 



92 COSTS 



It is a matter of record that the judges reported 
a close decision based on points in favor of the 
affirmative. 

The affirmative argued that in order to secure 
complete cost data for comparison and analysis, 
every item of expense necessary in production 
should be included; that inasmuch as equipment, 
buildings and lands are necessary to production, 
the interest on the investment they represent 
should as rightfully be considered an operating 
expense as the depreciation or the upkeep on such 
equipment, buildings and lands. They argued 
further that this was absolutely essential in order 
to secure standardized costs for comparative pur- 
poses. 

It was pointed out that if a building were rented 
for manufacturing purposes, the rent charged for 
this building would be readily accepted as an 
operating cost. But this rent would certainly 
include the interest on the investment; therefore, 
if the building were bought or built instead of 
rented, the interest on the money invested must 
be charged into manufacturing costs as would be 
done with the rent. It was pointed out that if 
this were not done, the manufacturer who rented 
would show a cost higher than that of the man 
who used his own capital, while actually the cost 
would be the same, or only slightly different. 

Further the defense showed that the two condi- 
tions might occur in different departments or 
plants of an organization, or during different 



COSTS 93 



periods of the organization's activities, and that in 
order to secure cost data which would be truly 
useful and correct for comparisons of work in dif- 
ferent departments or plants, or during different 
periods, it would be necessary to standardize the 
basis for figuring these costs. Since rental charges 
for equipment, buildings and lands have been 
accepted by long practice as legitimate expense, 
such items used in making up this rent must also 
be included. Interest was considered one of these 
items. 

The negative argued that interest was rightfully 
a profit on investment and, therefore, should be 
taken out as a part of the profits, and that, from 
an accounting point of view, to use a valuation 
which included interest charges for inventory pur- 
poses was incorrect. They stated further that 
the attempt to secure a cost which included every 
item was impractical, inasmuch as it was impossi- 
ble to definitely measure all items of expense 
against cost. They believed this attempt was 
being carried too far and that theorists were its 
only advocates. 

They pointed out that it was impractical to 
include the interest item in costs because rates of 
interest varied greatly and were therefore difficult 
to establish. 

Another negative argument was that court 
decisions had been made against this practice. 

In rebuttal the affirmative disagreed with the 
statement that interest on investment made to 



94 COSTS 



produce for profit was a part of profit itself. They 
argued that this method of charging interest on 
capital invested into manufacturing cost was in 
practice by a great many successful and typical 
companies who were finding it advantageous, and 
that it was advocated by recognized authorities 
of good repute. That certain items could not be 
definitely measured, was in reality an argument 
for, and not against, charging interest into manu- 
facturing cost, since as many items as possible should 
be definitely charged, and interest was among the 
possibilities. 

They claimed that interest rates for any invest- 
ment were unstandardized and would be whether 
interest was taken from profits or included in 
costs. That this was the case was no argument 
against the theory of charging an acceptable rate, 
which would be recognized as conservative, al- 
though probably not standardized. 

As regards court decisions the affirmative argued 
that such decisions were made because of mis- 
application of the information secured rather than 
because of the theory of the practice itself — and 
further, that court decisions of this nature were 
recognized as not altogether authoritative. 

Both sides were well equipped with authorities 
for their arguments, which points out that this is 
a subject debatable not only by societies but by 
many individuals as well. 

Another interesting opinion on this subject is 
that brought out by Mr. George W. Veale in an 



COSTS 95 



article published in 100%, The Efficiency Magazine 
in June, 1917. It is reprinted here by permission. 
The influence of war production and cost plus 
contracts is well indicated. The article follows: 

"The prospects for limitation of profits on goods 
manufactured for the government and to be used 
in prosecuting the war, will naturally raise much 
discussion as to just what shall constitute the cost 
upon which the limited profit will be permitted. 

"For years cost men have held for open debate, 
the question of including interest on invested 
capital, but now this point has a renewed interest 
and takes on a somewhat different aspect. If the 
exponents of the negative side have enjoyed the 
greater popularity in the past it would seem certain 
that they are now due for a reverse ; at least during 
the period of the war. 

"In normal times when profits can be controlled 
by quality and competition plus good advertising, 
it no doubt is safe to figure costs without including 
any interest on capital, allowing that the profits 
cover the interest on the money invested, as well 
as the reward for a good product, and good man- 
agement. However, if the government work is to 
be taken on a 'cost plus' basis, it is doubtful 
whether the allowed percentage would be sufficient 
to conduct the business successfully and pay 
dividends. 

"The investing public can be induced to risk its 
money in business enterprises only when it can be 
shown chances for large profits, and therefore, if 



96 COSTS 



the immediate future holds out prospects of 
limited profits in certain lines, there will undoubt- 
edly follow a heavy unloading of such securities, 
when the money will naturally gravitate to more 
lucrative fields. 

"There are innumerable opportunities for invest- 
ing funds in ways where the principle is secure, 
and, where, though the interest or profit is small, 
it can be had with a minimum of effort and worry, 
and for this reason the braver man who will risk 
his money backed by his energy and good judg- 
ment, in an enterprise that is of immediate use to 
the government in a time of great peril, should be 
guaranteed at least the same opportunity of mak- 
ing the same profit as the more timid and con- 
servative man who prefers to invest in bonds and 
other securities, and he should further be given 
an opportunity for a greater reward, because of his 
industry and daring. 

"This means then, that if contracts for govern- 
ment work are to be let on the 'cost plus' basis, 
it should contemplate that a stated per cent of 
interest on the invested capital be included in the 
cost." 



CHAPTER XVIII 

INTEREST ON INVESTMENT TAKEN FROM PROFIT 

AVERY interesting series of arguments in 
favor of taking interest on investment out of 
profits rather than of making it a charge 
against costs was brought out by Mr. C. E. Knoep- 
pel in his testimony in the case of the American 
Newspaper Publishers Association against the 
Manufacturers of Newsprint Paper before the 
Federal Trade Commission in May, 1918, when he 
was retained by the former association to present 
expert testimony on this subject. We are privil- 
eged to offer this in the following: 

"Costs of operation should not include in them 
any charge covering interest on investment, as 
this would serve to anticipate earnings, through 
including a profit before it was made. What is 
actually put into a business is the investment. 
What is actually earned, is the interest or return 
on the investment. 

"Interest on borrowed money should not be 
made a charge against cost of operations, as bor- 
rowed money from the viewpoint of operations, is 
equivalent to capital invested. An industrial with 

97 



98 COSTS 



sufficient capital to build, equip, and provide work- 
ing funds should pay the returns on the investment 
out of profits. Borrowed money indicates insuf- 
ficient capital invested, making it necessary to 
bring in additional funds, and the interest charge 
should likewise come out of profits.' ' 

This is the general brief outline of the testimony. 
The further analysis brought out by Mr. Knoeppel 
follows : 

"Money put out in bonds and mortgages at 
four per cent carries only very small elements of 
risk. An individual who goes into industrials 
carrying a greater hazard, for which he expects to 
make a much greater return, may even feel that he 
may lose all, and to charge interest which could 
have been realized in a safe investment against the 
operating expense of a business wherein there is a 
much greater risk is manifestly wrong, for this is 
equivalent to determining that the industrials earn 
a profit, thereby putting it up to a certain point 
in the class of guaranteed propositions, which it 
really is not. Further would that investor if he 
put his money in bonds and mortgages charge him- 
self with a loss by the difference between what he 
nets and what he might make in an industrial? 

"Including interest on investment in a strictly 
competitive business in cost of operation may mis- 
lead to such an extent as to operate against getting 
the business which should otherwise belong to the 
concern. 

"Including interest on investment in cost results 



COSTS 99 

is a wrong conception of costs since on top of costs 
must be figured a profit that will yield a fair return 
on the investment; the double addition is really 
very confusing. 

"Figuring interest on investment in cost of the 
product is equivalent to securing profits before 
they are earned. There can be no profits where 
there are no sales. 

"Interest on borrowed money is the same as 
dividends paid out of profits as the money is bor- 
rowed because there is insufficient capital. If there 
were sufficient capital the interest saved would be 
a profit and go out as dividends. 

"Further why should a consumer have to pay 
the penalty of management's inability or unwilling- 
ness to provide sufficient capital to properly run 
the business ?" 

In the same case Mr. H. L. Gantt in giving his 
expert testimony on this particular feature briefly 
stated : 

"The cost of the article or commodity should 
include only the actual labor, material and expense 
necessary for its manufacture and should not in- 
clude a profit through the various steps of manu- 
facture." 

Here we have the viewpoints of two engineers 
who have made studies of this problem for many 
years. Further investigation will show that they 
have many supporters in their contentions. 

As will be seen after a study of the arguments 
brought forth on both sides of this question, there 



100 COSTS 



are, seemingly, very logical principles supporting 
each, and one can easily come to the conclusion 
that which plan you should follow depends upon 
what you are trying to prove. 

In either case it should be recognized as a respon- 
sibility by the managing executive, regardless of 
the way the effect is brought to his attention, and 
regardless of which plan is followed. It is a part of 
the final price charged for the commodity; hence 
it must never be entirely neglected in this reck- 
oning. 

There is probably more harm done in business 
practice today by failure to include this item at all, 
either as a part of costs or of profit, than by error 
in choosing the proper method. 



CHAPTER XIX 



DEPRECIATION 



THE METHOD which is followed in handling 
depreciation, or the failure to consider it at 
all, often represents the difference between 
success and failure in business. 

Depreciation is a class of burden expense which 
is much neglected and misunderstood, possibly due 
to the fact that the expenditure does not appear 
to be immediate, that there is not the same evi- 
dence pointing to the fact that such expense has 
been incurred as there is for other expenses, such 
as labor and materials, which are paid for cur- 
rently, and that, further, it is so difficult to pre- 
determine exactly the amounts chargeable to this 
item. 

Just how many millions of dollars have been 
lost through the failure to properly charge depre- 
ciation, or to charge it at all, or through misappli- 
cations, it would be very hard to estimate. Ed- 
ward N. Hurley, in his report to the Federal Trade 
Commission, gave it almost first importance. 

It is hard to understand why otherwise shrewd 

101 



102 COSTS 

and conservative business executives, who will 
bargain for material, wages and other operating 
expenses and will cover themselves fully on these 
items in their selling prices, do not recognize in 
any way whatsoever the cost of depreciation of 
their facilities and equipment as a production cost. 

The expense is going on daily although its 
existence is not emphasized by actual daily expend- 
itures. It is only when a machine or piece of 
equipment actually goes out of use and must be 
replaced at great expense, that many executives 
realize the existence of this expense at all. 

Fortunately the Federal excess profits tax has 
forced a greater appreciation of depreciation as a 
factor in operating expenses. This should certainly 
tend to bring about a greater recognition of depre- 
ciation as a part of cost as well as further research 
as to methods and extent of this inclusion. 

The problem of depreciation should be recog- 
nized as a real engineering problem, involving as 
it does the consideration of the use, application, 
cost and value of equipment and so many other 
factors with which only engineering experience can 
cope. It should not be disposed of merely as an 
accounting record made to follow percentage plans 
rumored to be in use elsewhere. Properly handled 
it usually requires an engineering appraisal or 
revaluation, then a study of particular conditions 
and circumstances in each case to establish the 
basis for further handling and charging. 

The various changes which occur to affect the 



COSTS 103 



value of lands, buildings and equipment, and in 
that way to change the amount of capital upon 
which interest should be charged, are worth much 
study and discussion, and bring into consideration 
the question of depreciation. 

Lands seldom depreciate or decrease in value, 
and their valuation usually remains the same for 
very long periods. 

Any increases which are legitimate and con- 
servative can be taken care of by periodical re- 
valuation and appraisal. 

Buildings and equipment seldom, if ever, in- 
crease in value and in most cases depreciate. This 
depreciation is due to two general causes: 

1. Because of wear and tear on buildings and 
equipment, which after a certain term of usefulness 
makes necessary the replacement of part or all 
of them. 

2. Because of the fact that changes in business, 
new inventions, and changes in method often make 
it necessary to change and improve buildings and 
equipment and make those in use obsolete. 

It is, therefore, necessary to decide their term of 
usefulness and charge off to operating expenses as 
a burden item, periodically, a sum equal to the 
amount of their decrease in value for the period 
carried. To estimate and determine the length 
of this term of usefulness is usually much more 
difficult than it seems, and requires good judgment 
and counsel, backed by much experience. 

The more important factors which must be con- 



104 COSTS 



sidered in determining the term and rate of depre- 
ciation are as follows: 

1. The original value of the items 
-2. The kind of equipment or building 

3. The use to which they are put 

4. Their location 

5. Their probable value after their term of use- 
fulness is ended 

6. The method of upkeep and maintenance 

7. Whether or not they will be in constant use 
or the estimated time they will be in use 

8. The probable length of time which the manu- 
facture or use to which they are put will 
continue 

9. The probable length of time they will be in 
use before change in method or new inven- 
tions will make them partially or wholly 
obsolete 

10. The probable length of time they will last 
before wearing out to such an extent that they 
will have to be replaced 

11. The policy of the organization — whether it is 
conservative and wishes to be fully protected 
against all future and probably remote emer- 
gencies, or is willing to risk future losses to 
show present profits. 

Much more could be said about each of these 
factors, but we wish to emphasize that in every 
case some of them, and in many cases all of them, 
must be considered. 



COSTS 105 



It will be noted that many of these factors are 
only approximations and very difficult to deter- 
mine, so that here good judgment must be exer- 
cised and the best available counsel and practical 
experience in the use of equipment brought into 
use. Unfortunately it is rarely possible to com- 
pare rates of depreciation in one business with 
those in another, except in a very general way, 
because of the fact that some of the factors men- 
tioned above will be changed, and there are very 
few records of past experiences available for 
reference which are valuable. 

Terms of depreciation on buildings commonly 
range from one to fifty years and on equipment 
from one year to twenty -five years. 

The cost of foundations and installation of 
equipment should not be included in the value of 
the equipment, since this work usually has little 
value in case of resale. In some cases it is charged 
as a current expense. Probably the more correct 
method is to depreciate it very quickly over a 
short term. 

There are two methods between which to choose 
in charging off depreciation. The first, to charge 
off at the rate of depreciation decided upon from 
the original value; the second, to charge off at the 
rate of depreciation decided upon from the net 
value each year after previous years' depreciations 
have been deducted from the original value. It 
would seem that the first named method is the 
least complicated and most logical. 



106 COSTS 



The correct method of disposing of depreciation 
so charged is to put these amounts into a reserve 
fund, which is used to pay for replacement of 
buildings and equipment as this becomes necessary. 

In order to handle the depreciation correctly and 
most satisfactorily it is necessary to develop a 
record of all equipment and buildings upon which 
depreciation charges are made, and keep it up-to- 
date. Then, by collecting the various items into 
classes according to rates of depreciation, the work 
of calculating the correct amounts will be facili- 
tated. 

In classifying these charges the same rules should 
be followed as described for other burden expenses ; 
that is, to classify in such a manner that the respon- 
sibility for the various items may be easily traced. 
They may be classified according to machines, 
operations, departments or divisions. 



CHAPTER XX 

BURDEN AND EXPENSE DISTRIBUTION 

AFTER we have properly collected and classi- 
fied each and every item of burden expense ; 
after we know exactly how much has been 
expended for every class of expense burden, how 
shall we determine the proper percentage to be 
charged to various departments and productive 
divisions; to each order or contract; to each hour 
of labor or machine work, and finally to each unit 
of production? How can we determine the effect 
of burden on the cost of production, or what por- 
tion it represents of the selling prices of the various 
commodities handled or produced? 

It can be stated emphatically that there is no 
one method which can be followed as best and cor- 
rect for all businesses in distributing burden 
expense. 

We will first discuss the methods of distributing 
the burden or those expenses which have been 
classified directly against the individual operating 
department or division. This does not include 
the general expenses and selling expenses the dis- 

107 



108 COSTS 



tribution of which will be discussed later in this 
chapter. 

There are four methods of burden distribution 
which are commonly used, as follows : 

1. Percentage on direct wages 

2. On a basis of direct labor hours 

3. On a basis of machine hours 

4. On a basis of material cost or quantities. 

The percentage on direct wage plan is usually 
used where wages are paid on a piece rate basis, 
where time keeping by hours is disapproved and 
where wages constitute a large portion of the total 
production costs and vary greatly. 

To make this distribution it is necessary to 
determine the percentage of the total burden to 
total direct wages for any stated period, and 
charge each product with an amount determined 
by this percentage of the direct wages expended 
on the product. 

Distribution on the basis of direct labor hours is 
usually made where work done is accounted for by 
hours direct labor. Here the total burden is 
divided by the total number of hours direct labor, 
and each hour of direct labor furnished to produce 
a given commodity, or to accomplish a certain job, 
is charged with a burden cost at this burden rate 
per hour. 

Distribution on a basis of machine hours is 
usually made where most of the work is done on 
machines, and a large proportion of the burden 



COSTS 109 



cost represents investment in equipment. To 
make this distribution it is necessary to determine 
exactly what costs are chargeable to each machine, 
and divide these costs by the number of hours the 
machine operated on productive work, to deter- 
mine a machine hour rate. The number of hours, 
machine work put in to produce each unit is mul- 
tiplied by this rate to determine its cost. 

Distribution on a basis of material cost or quan- 
tity is used in warehouses or large storage yards 
which go beyond the realm of ordinary manu- 
facturing stores or stocks, where material repre- 
sents the greater portion of the cost, and where the 
product is all the same or divided into certain large 
general classes. 

Distribution on a basis of material quantity is, 
of course, also applied in such plants as foundries 
and blast furnaces where tonnage produced is the 
practical unit of measurement. 

If distribution is made on the material cost 
basis, the percentage of burden costs to material 
costs is established and applied at that rate. If 
distribution is made on a basis of units of material, 
the total burden is simply divided by the total 
units and a rate per unit established. 

The above methods briefly cover the distribu- 
tion of the burden, or plant and departmental 
overhead. The next several chapters will discuss 
thes emethods in greater detail. 

The method of loading or distribution of the 
administrative or general expense, that expense 



no costs 

which cannot be definitely allocated to the individ- 
ual department or plant, and of the selling ex- 
pense., is more commonly understood and generally 
accepted. There is really but one practical 
method: it is to distribute these expenses as a sur- 
charge on the total value of the product, including 
in this value all the elements of cost with burden 
added. Selling expenses should, of course, be 
shown as a charge separate and distinct from 
general expenses. 



CHAPTER XXI 

PERCENTAGE TO DIRECT WAGE 
BURDEN DISTRIBUTION 

OF THE four methods of burden distribution 
in ordinary use, the percentage to direct 
wage plan is probably the most common. 
There is due, no doubt, to the practicability and 
simplicity of its application, which often cause it 
to be used^where other methods would be more 
accurate. 

* ~ It is true that on account of these two qualifica- 
tions it has certain advantages over other more 
complicated methods; first, because it often costs 
less in clerical help to maintain; second, because 
its simplicity makes it more readily understood by 
the executives who, after all, give any method of 
burden distribution its only value by studying 
and using the facts it portrays. 

It should be kept in mind that the executive is 
usually a very busy person with a mind tending 
toward generalization rather than detail, who, 
therefore, requires wherever possible methods of 
utmost simplicity, easy to follow. How much 
inaccuracy can be overlooked in view of the prac- 

111 



112 COSTS 



ticability and simplicity of this plan, depends, 
first, upon the extra cost involved in maintaining 
the more accurate though less simple method, and 
second, upon the amount of time and intelligence 
the executive for whom the distribution is made 
will devote to the study and use of the results 
obtained. It must be remembered that although 
no mathematically correct method of burden dis- 
tribution is practical, the most accurate records 
obtainable are still worth considerable energy and 
money if they are properly and sufficiently used. 

The percentage to direct wage method of burden 
distribution is in such common use that it seems 
hardly necessary to describe the details of its 
application, and we will content ourselves with a 
very brief description of its main points for the 
benefit of any who may not have had the oppor- 
tunity to see it in use. 

Under this plan all burden or overhead expenses 
are collected for a certain period, either as a total 
for each department or under certain classified 
accounts which are later totaled. This total is 
divided by the total of all wages paid out for direct 
labor during this period, in order to secure the per- 
centage of the burden to the direct wages. To 
secure the cost of burden chargeable to a particular 
order, contract or commodity, it is merely neces- 
sary to multiply the cost of direct wages expended 
on it by the percentage secured as described above. 

This plan has many inaccuracies as intimated 
before. For instance, a fifty cents an hour 



COSTS 113 



employee, working at a hand operation, requiring 
less than twenty dollars' worth of floor space and 
equipment, will carry the same amount of burden 
as the same priced man who operates a high priced 
machine carrying five times that amount of burden 
for depreciation. The only condition of this kind 
under which the burden will become equalized on 
any individual order is where each order requires 
approximately the same amount of each kind of 
direct labor which is done in the factory. It will 
be seen that this method is not absolutely correct 
where there are many machine operations and 
few hand operations, each of the former being done 
on machines of a different and widely varying 
value. If, however, the operations are mostly 
hand operations, the machines, floor space and 
other equipment used for each operation are of 
approximately the same value, this method will 
ordinarily be found to be as correct as any. 

Many inaccuracies are pointed out where the 
rates of men working at a given operation vary 
greatly. For instance, a workman rated at forty 
cents per hour will carry only half as much burden 
as the one rated at eighty cents per hour, even when 
he works on the same kind of operation and 
machine. It is further pointed out that the first 
man should properly carry more burden than the 
second man because he is probably newer in the 
work and requires more supervision and instruc- 
tion, and also because he probably breaks more 
tools and spoils more material. This is not as 



114 COSTS 



serious a defect as it would seem, however, because 
the cheaper man in most cases requires much more 
time to perform the operation than the more 
expensive man, and, therefore, the direct wages 
on a given job, and with it the burden charged, 
equalize. However, the percentage to direct wage 
plan will serve its purpose best where the rate of 
wages for direct labor on each operation, and, 
better still, for the entire shop or department, is 
very nearly the same. 



CHAPTER XXII 

DIRECT LABOR HOUR BURDEN DISTRIBUTION 

MUCH that was said in our discussion of the 
percentage to direct wage plan of distrib- 
uting expense burden, applies to the per- 
centage to direct hour plan. These methods are 
very similar in application, both being based upon 
labor, and vary only in that the first method 
requires the use of the cost of this labor for its 
application, while the second requires only the 
use of the time. It follows that they have this in 
common: that they are both most successfully 
applied where labor, either in amount of time or 
value, is an important factor in the cost of pro- 
duction. 

In application and use the percentage to direct 
hour plan is just as practical and simple as the 
percentage to direct wage method, if not more so. 
A brief description of its application follows: All 
items of burden or overhead expense are collected 
under their various classifications, as has been 
described before, and totaled for a month or any 
given period. A total is then secured of all direct 
labor hours expended during the same period and 

115 



116 COSTS 



this total is divided into the total amount of burden 
expenses, to secure an hourly rate of burden ex- 
pense with which to charge each hour of direct 
labor in determining the cost of any given piece 
of work. 

The direct hour plan has many supporters who 
believe that it has eliminated all the disadvantages 
of the percentage to direct wage method, particu- 
larly because in its application the amount of 
burden charged to an hour's labor of an eighty-cent 
man in a given operation is the same as that which 
is charged to an hour of a forty-cent man in the 
same operation. 

The direct hour plan has most of the other inac- 
curacies of the direct wage plan, especially because 
it, too, neglects to take into consideration in any 
way whatsoever the varying conditions and equip- 
ment necessary to the different operations, and it 
charges the same rate per hour to each operation 
whether it requires equipment and floor space 
worth $20 or $2,000. This is obviously incorrect, 
and it will be seen from this that it is not well to 
use this method of distribution where the floor 
space, equipment and other requirements vary 
greatly in value under the different operations. 

This can be corrected, however, by a combina- 
tion of a direct hour rate for workers and a machine 
hour rate to cover equipment charges. 

The development of a standard rate per hour is 
usually productive of valuable results where the 
hourly burden rate method is applied, since it 



COSTS 117 



provides an ideal which can be kept before those 
responsible for the various items of burden ex- 
pense, and further than this, the actual hourly 
burden rate can be compared with the standard 
and a united effort made to bring the actual rate 
down to the standard. 

The original standard rate is developed by 
accumulating every item of legitimate and neces- 
sary expense, and dividing its total by the number 
of hours which it is estimated every man and 
machine working on direct labor will be kept busy 
on such labor; this usually is around eighty to 
eighty-five per cent. In many cases a bonus is 
paid to foremen, based upon an efficiency partly 
determined from an attainment of a high per- 
centage of, or the whole of this standard burden 
rate. The mere development of a standard rate 
may serve to bring to light many conditions which 
were never before known to exist. 



CHAPTER XXIII 

MACHINE HOUR BURDEN DISTRIBUTION OLD PLAN 

THE inception of the machine hour plan of 
burden distribution can probably be traced 
to the first attempt to take into serious con- 
sideration that which all previously mentioned 
plans (direct wage percentage, direct hour per- 
centage, material cost or quantity, etc.) failed to 
recognize properly, viz., the proportionate dif- 
ferences in burden costs between work done on 
various kinds and types of machines, due to very 
obvious differences in original cost of equipment, 
power consumption, floor space used, etc. 

Take, for instance, a machine costing $4,000, 
with depreciation at the rate of 10%, using floor 
space annually worth $500; its total annual burden 
on these items would amount to $900. Beside 
it imagine a machine worth $500, with the same 
depreciation rate, using but $50 worth of floor 
space. Its costs per year would total $100. Yet, 
the burden cost chargeable on two jobs done at 
these machines would be exactly the same, no 
matter how long they were used, under the direct 
wage distribution plan, provided the direct wages 

118 



COSTS 119 



on the jobs were the same. If the direct labor 
hour plan is used, the charge would be the same if 
the total direct labor hours expended were the 
same. Again, under the material distribution 
plan, if the material cost or quantity were the 
same in both cases, the charges would be identical. 
It is such evident and gross errors as these that 
the machine rate distribution plan aims to elimi- 
nate. 

There are, generally speaking, two distinct plans 
of machine hour burden distribution. The first 
plan we will call the Primitive Machine Rate plan, 
as it is the oldest and most undeveloped. It aims 
to take care only of such items as depreciation, 
insurance and power consumption, which vary to 
a recognizable and large extent by machines. It 
neglects all other smaller and more general items. 
It is, as a rule, used to cover producing machines 
only. 

The second and more modern plan, which we 
will term the Scientific Operation Hour plan, is, 
as the name implies, a more scientific analysis of 
this problem. It aims, by a complete and thorough 
scientific analysis of every item of burden expense, 
its source, classification and detail, to establish a 
burden rate per hour for each and every produc- 
tive operation, including in this rate proportions 
of each and every burden item which can possibly 
be measured to the operation in any manner what- 
soever, and distributing any remaining amounts 



120 COSTS 

by any one of the more general distribution plans 
which best fits the case. 

In this chapter we will concern ourselves only 
with the former plan, leaving the latter for dis- 
cussion in the next chapter. 

A simple example of an application of the Primi- 
tive Machine Rate plan will effectually point out 
the peculiarities of it. A man purchases a motor 
truck and plans to drive it himself, offering his 
own services and the truck at a stipulated rate 
per hour. He arrives at this rate of cost per hour 
by deciding how much time he believes necessary 
in which to make the truck pay for itself, the 
annual cost of insurance, the cost of garage and 
the salary he believes he should earn, and dividing 
the total cost of all these items for a year by the 
estimated total of effective working hours in the 
year, usually at the rate of eighty to eighty-five 
per cent of the total. 

There are other items, such as repairs, oils, 
grease, etc., the amount of which he does not 
definitely know. These he either neglects to con- 
sider at all, expecting them to be taken care of by 
the total earnings, or he sets an arbitrary amount 
which may or may not cover such items for the 
year. It should be noted that this brings up one 
very decided complication, for these indefinite 
items may total so much that all estimated profits 
may turn into losses. 

Next he encounters what is probably the most 
troublesome complication to overcome in this 



COSTS 121 

plan — the idle time due to breakdowns or insuf- 
ficient work. To earn the cost, the machine must 
work every hour of working time, and this is not 
always possible. Unforeseen delays will occur. 
To overcome such losses the rate for the time that 
the machine is working must be increased, but 
this it is not always possible to do with any degree 
of accuracy. 

Although this plan applied as described will be 
as accurate as any, if the burden items are all 
included, and no idle time occurs, or the amount of 
it is correctly estimated, it will be noted that even 
in a simple application it can become, by neglect 
of these things, very inaccurate. And when the 
application of the plan becomes more complicated, 
as it will if two or three motor trucks are operated 
and the idle time of one is charged to the working 
time of the other two, and more general items of 
burden begin to appear, such as supervision, wash- 
ing, etc., then the method no longer remains as 
accurate and as simple as many suppose. 

In applying this plan to the average manufactur- 
ing or industrial plant, complications of greater 
significance are, of course, encountered, which will 
tend to make the application much more difficult 
and far less correct. For instance, all operations 
may not be machine operations, some may be 
hand operations which are executed now at one 
place, now at another, and for which no machinery 
is required. A definite rate is difficult to establish 
for such items. A costly machine may operate 



122 COSTS 



but a few hours each day, requiring a minimum of 
supervision, material-handling labor and other 
burden items of a general nature, while another 
and much cheaper machine may operate con- 
tinually using such burden labor and items in a 
greater proportion. Such differences must be 
analyzed and equalized. Finally, and probably 
most important of all, machines do break down, 
and they do remain idle for various causes. It 
is rarely possible to estimate such idleness cor- 
rectly. 



CHAPTER XXIV 

MACHINE HOUR BURDEN DISTRIBUTION — 
MODERN PLAN 

WE NOW approach the discussion of the 
second and more modern plan of machine 
hour burden distribution, which we have 
termed the Scientific Operation Hour plan. 

This plan, although much like the older method 
of machine hour distribution described in the last 
chapter, aims to improve upon it by broadening 
its application. This is done by having it cover 
not only machines but each and every unit opera- 
tion, including all those done by hand. Further- 
more, it analyzes completely, thoroughly and 
scientifically, all items of burden, charging to these 
unit operations, directly, all items which can pos- 
sibly be measured accurately and definitely against 
them. It also distributes all remaining amounts 
by any one of the more general distribution plans 
which can most properly be applied. 

The application of this plan is, briefly, as follows : 
The plant to which it is to be applied is first divided 
into logical departments or divisions. The floor 

123 



124 COSTS 



space in each department is subdivided carefully 
into operating spaces, each one allotted to an 
operation, in some cases containing machines, and 
in others containing merely work benches or mis- 
cellaneous equipment for hand operations. These 
operating spaces are often called "small shops" 
or "production centers," and the further develop- 
ment of this plan must be approached from the 
viewpoint that the distribution of every possible 
item of burden must be narrowed down to these 
"small shops" as far as practical. 

After a total of all such items has been secured 
for each "small shop," an estimate is made of the 
probable number of working hours the "small 
shop" will operate, and the total amount of the 
burden items as developed, divided by the total 
number of hours, gives the burden rate per hour 
for the operation. 

All items of burden which cannot be measured 
against the "small shops" are collected as a whole 
and then distributed according to the one of the 
other methods of average burden distribution 
which seems to best serve the purpose. Where 
machines or operations do not operate for the 
previously estimated number of hours, the cost of 
such idle time is also charged with this total 
general item of burden, and distributed with it on 
the same basis. 

It is usually assumed that this plan is more com- 
plicated and entails much more clerical labor than 
other plans. While this is true to a certain degree, 



COSTS 125 

the greater part of the extra work necessary occurs 
when the classifications of burden items and the 
division of the plant into "small shops," are first 
made, and when the rates for each operation hour 
are originally developed. This statement is made 
assuming that no further complications arise, 
such as the need for change in conditions which 
affect the rate. It is also assumed that the rates, 
as correctly developed, remain in force for a reason- 
able length of time. 

The Scientific Operation Hour plan of burden 
distribution has many supporters, and many of its 
advocates claim it is the ideal method for handling 
this problem. Their arguments are based upon the 
theory that the majority of the burden items are 
of such a nature that they can logically and accu- 
rately be measured against the various unit opera- 
tions. It is pointed out that such items as rent, 
depreciation on equipment, insurance, etc., can be 
measured against the operations in accordance 
with the methods outlined above. They claim, in 
fact, that the great majority of items can be so 
measured if they are studied thoroughly and scien- 
tifically. 

If such conditions obtained in all cases, and no 
further complications ensued, this plan would 
indeed be an ideal one, but, while we believe that 
such conditions do exist in a number of cases, we 
are convinced that their proportion to the whole is 
not very great. Our idea of an ideal plan is one 



126 COSTS 



which would cover the majority of cases most 
accurately. 

In a number of cases most of the burden cannot 
be definitely measured to such "small shops" with 
any great degree of accuracy, and the plan, at the 
same time, be kept practical. The value of this 
plan increases or decreases with the proportion of 
the total burden that can practically, accurately 
and definitely be measured to these "small shops." 
It must be remembered that all burden in excess 
of items so measured must be further distributed 
according to some other plan of distribution, which 
may be inaccurate enough to detract considerably 
from the absolute accuracy that this plan attempts 
to attain. 

There are also many cases where the conditions 
surrounding the various operations, and, therefore, 
the "small shops," change so frequently that pro- 
portionately frequent changes must be made in 
the rate. Unless constant supervision is applied to 
ascertain such changes, and sufficient clerical help 
is retained to take care of making the revisions in 
rate which follow them, the plan loses its value to 
a marked degree. 

This plan also has, as was pointed out before, 
a disadvantage which is coincident with a disad- 
vantage of the old machine hour plan of distribu- 
tion. This is the failure to account for lost operat- 
ing time. Machines break down and there are 
resulting delays, not only to the machine incapac- 
itated, but in some cases to following machine or 



COSTS 127 



hand operations. Operations, both hand and 
machine, are frequently stopped for various periods 
for lack of work. Under the Scientific Operation 
Hour plan such losses in time, unforeseen and not 
estimated, must be paid for by the machines or 
operations which are not idle. Their cost is dis- 
tributed as a part of the total general burden 
according to some other plan, thereby merely 
obtaining the same result in a more complicated 
manner and with a larger expenditure of effort. 
To serve its purpose best, this plan must, therefore, 
be applied where operations are continuous, or 
where lost hours can easily and accurately be pre- 
determined. 



CHAPTER XXV 

BURDEN DISTRIBUTION ON MATERIALS 

WE NOW turn to that method of distribution 
which uses materials as a basis. This 
method probably ranks second in use only 
to those which distribute on a basis of labor. We 
firmly believe, however, that it is wrongly used in 
a great number of cases, and is misapplied more 
often than any other one scheme of burden distri- 
bution. Its popularity is probably due to its 
simplicity and to the fact that it is so easily under- 
stood. Its frequent misapplication is due to the 
fact that while we find it very commonly used, the 
conditions required to make its use correct and 
fitting are not so common. 

There are two ways of applying burden distri- 
butions with material as a basis. One uses a unit 
of the material for this basis; the other uses its 
cost. To make this distribution, all items of bur- 
den are first classified and then collected as a total 
for a given period. This total is divided by the 
number of units sold, shipped or produced during 
the same period, if it is desired to use units as a 
basis for the distribution, and a burden cost per 

128 



COSTS 129 



unit is obtained at which rate all such units are 
charged. If the distribution is to be made accord- 
ing to the material cost, the percentage of the 
burden to the cost is computed and burden charges 
are added to the material cost on each job, order, 
commodity or contract according to this per- 
centage. 

In order to emphasize our assertion that this 
method of distribution cannot be accurately ap- 
plied in nearly so many instances as is commonly 
believed, and that its use is often ill-advised, we 
wish to point out several necessary requirements 
which should be considered in choosing a method 
of burden distribution, and which must be satisfied 
by the method chosen. 

All distributions of burden, in order to be most 
nearly correct, must be based upon factors which 
cause its existence and control or affect its amount. 

There are various factors causing and affecting 
burden-expense, and the method of distribution 
most nearly correct will ordinarily be the one which 
is based upon units or measureable quantities of 
those factors which caused most of it, and which 
have the greatest effect upon it. In other words, 
if the greater part of a burden total consists of 
items such as supervision, timekeeping, etc., which 
are caused by labor operations and which can be 
increased or decreased by such labor operations, a 
distribution according to this labor would be most 
consistent. If, on the other hand, the greater 
amount of the burden total existed because of 



130 COSTS 



material quantity or cost, some method which 
included a distribution based upon this varying 
quantity, or a percentage of it to the cost, would be 
found most accurate. In some cases it is possible 
to classify burden items according to these two 
divisions of factors causing burden — labor opera- 
tions and material — and make the distributions of 
the totals of these two classes, the one based upon 
labor time or cost and the other based upon 
material quantity, unit or cost. 

We must, therefore, analyze the items which 
make up the total of the burden to be distributed, 
and by the application of the above rule choose 
the method which will serve the purpose best. It 
should be remembered that wherever it is possible 
to use the distribution according to material it has 
this particular and important advantage — it car- 
ries the charges direct to the commodity, which is, 
of course, the ultimate disposition of all burden 
charges, without much further detail. 

We believe, however, that rarely will conditions 
be found under which the greater part of the bur- 
den is caused directly by the material cost. Such 
items as burglar insurance and fireproof storage 
might be directly affected. However, the fact that 
for some reason or another the market on a certain 
commodity has suddenly risen does not make it 
correct to charge this commodity, for instance, 
with a larger proportionate part of the cost of 
rent, or supervision. Unless it is a very simple 
proposition, where only one kind of material is in 



COSTS 131 



use, cost of storage will not be correctly charged 
off, because we rarely find that the cost of different 
commodities varies with their bulk or shape. 
Even where only one kind of material is used this 
method may not be correct because there may be 
different grades of the commodity, which, although 
varying in price, retain the same shape and bulk. 

It might seem, then, that rent could be correctly 
charged according to units (bulk or weight) of the 
material and this is true, but rent for storage of 
material is not often a large part of the burden 
cost, unless in warehouses or stores. Rent for 
space used by machines or men in manufacturing 
is often a very large item, and this should certainly 
not be apportioned according to bulk or weight of 
material. The large item of supervision charges, 
caused by the employment of a very large number 
of workers handling various kinds of material, 
could not be consistently apportioned according to 
the cost of the various materials unless they were 
nearly alike, nor according to the amount of the 
materials unless all kinds were of the same bulk, 
weight or shape and were handled in the same 
manner the same number of times. 

Burden distributions, based upon cost of mate- 
rials, can, therefore, be correctly applied only where 
the commodity receives minimum handling and 
has little labor or machining operation performed 
upon it, where all the material is of similar size, 
shape, bulk and weight, and where the cost of the 
material is similar in all cases. Burden distribu- 



132 COSTS 



tions based upon units of materials can be applied 
best where the first two of these requirements exist. 

In the application of these methods we find 
opportunity for many errors. For instance, ex- 
penses which cover the cost of producing or 
handling material may be distributed for a given 
period over the cost or units of material sold in 
that period instead of the cost or units of material 
produced, or vice versa. Sometimes the amount 
or cost of material shipped is used as a basis. 

The distribution on a basis of material cost will 
be found useful and correct in few cases beside 
those representing warehouses or large storage 
yards which go beyond the realm of ordinary 
manufacture. The distribution based on material 
quantity or units will be found correct in such 
plants as foundries or blast furnaces where tons or 
pounds produced are the practical unit of measure- 
ment. 



CHAPTER XXVI 

CHOOSING THE BURDEN DISTRIBUTION PLAN 

THERE is no method of burden distribution 
which is absolutely mathematically correct 
and at the same time practical. 
To be mathematically correct it would have to 
distribute a foreman's time, minute for minute, 
against each job he spent time on either instructing 
or supervising workmen; it would have to distrib- 
ute cost of floor space according to the exact 
amount used by the men, the equipment and the 
material used on the job, and each of the three for 
the exact number of minutes this space was used. 
Power and light charges would have to be metered 
exactly to each job; the cost of sweeping and 
cleaning would have to be distributed against each 
square foot of floor space and redistributed as the 
floor space was used. If all these minute distribu- 
tions were practical and possible, there would still 
remain hundreds of other charges and expenses 

133 



134 COSTS 

which could not be practically distributed and 
at the same time be mathematically accurate. 

We must be satisfied, therefore, with a method, 
which, while being as nearly correct as possible 
under the existing conditions, is practical, both in 
development and application, and also in use. It 
must not be so complicated or require so much 
effort to accomplish it that the cost of the energy 
expended to secure the desired result exceeds the 
value of that result. 

We are earnest and sincere in our belief that cost 
accounting should be scientifically done, but to be 
valuable the science must be entirely practical. 
This must be remembered especially when con- 
sidering methods of burden distribution. If our 
enthusiastic search for accuracy in this branch of 
cost finding is not tempered by a demand for 
practicability, we will soon find ourselves in a 
maze of distributions and redistributions which can 
end in but one thing — "red tape." If carried to 
excess, this search will succeed only in collecting a 
vast amount of data which will have cost more to 
secure and will cost more to use than the value 
we can ever expect to gain from its possession. 
This danger is also imminent in other branches of 
cost accounting, but it is more apt to be overlooked 
when developing burden distributions, probably 
because here there are not so many natural and 
definite limitations to hold us to a practical course, 
nor can the value of the results be so easily deter- 
mined as in other branches. 



COSTS 135 



We have pointed out the two fundamental 
purposes of the burden distribution: 

1 . To assist in determining a selling price 

2. To aid in the analysis of the effect of an 
increase or decrease in the burden on the 
total unit production cost with a view to reduc- 
ing the latter. 

Let us discuss this point further, and emphasize 
the importance of its careful consideration in 
choosing a method of distribution. 

Let us take, for example, an organization which 
handles a raw product, warehousing and selling it; 
a number of hand and machine operations are 
necessary. The price of the product is fixed and 
the cost of the operations performed cannot be 
charged to the individual order. It is evident 
that all the work required by any method which 
distributes the burden to each order is to a great 
degree superfluous, especially if done continuously, 
since it does not serve to fix the price to be charged 
for that order. It seems entirely sufficient here to 
distribute burden to the various operations in 
order to study the effect of increased or decreased 
burden on these operations. If the majority of 
the operations are performed on machines, it may 
be best to develop machine rates, but on the other 
hand, if they are mostly hand operations, a per- 
centage to direct wage or to direct hours gives the 
best results. The burden cost of each order 
might be used, but it is doubtful if its use would 
obtain results enough better than those obtained 



136 COSTS 



by distribution to operations only, to pay for the 
extra cost of securing such costs. 

There are numerous examples of this kind which 
particularly point out the great necessity of 
measuring the effort by the result. 

Much of the foregoing discussion is to a certain 
extent in defense of the position which we take 
in handling the subject of burden distribution in 
previous chapters where we attempt to point out 
that each of the four most commonly used methods 
of burden distribution, namely, (1) percentage on 
direct wages, (2) on a basis of direct labor hours, 
(3) on a basis of machine hours, and (4) on a basis 
of material costs or quantities, has many advan- 
tages under certain conditions, and that for each 
condition one of these methods, sometimes with 
minor variation, can be applied. This is in con- 
trast to the attitude taken by some cost engineers, 
who attempt to develop one method, in itself 
commendable for certain purposes, and recommend 
it as a cure for all ills and best for all purposes. 

It is, of course, a fact that on straight manu- 
facturing there is really only one correct basis 
which serves all purposes in a given condition 
and the decision should be made in favor of the 
plan which will give the true costs, since this is,' 
after all, the one objective of a cost system. 

It has been pointed out that all the plans have 
definite advantages and disadvantages under vary- 
ing conditions and that they all have justified 
applications. Summarizing however, for general 



COSTS 137 



purposes, not forgetting our exceptions, the best 
plan for all practical purposes that to date has 
come to our attention is the direct hour plan, or, 
where equipment plays a large part, the combina- 
tion of the productive hour and machine hour 
plan, confining machine hour expense to deprecia- 
tion, maintenance and power to operate, and 
including all other items in the productive hour 
rate. 

The period over which a rate of percentage is 
figured and subsequently applied is very impor- 
tant, especially where this rate is used in estimating 
and pricing work. In some cases it is changed from 
month to month, in others adjustments are made 
annually. Where the rate is apt to change often, 
the rate to use in estimating and pricing should be 
changed correspondingly, since it is obviously 
incorrect to attempt to obtain orders on a basis of 
last year's high burden rates if this year's rates 
are materially lower. It is, of course, just as 
inaccurate to secure work at a low rate which 
existed in previous years when the present rate is 
high and expect next year's work to earn the extra 
burden expended this year. 

As a definite guage of the burden rate, and a 
means of stabilizing it, it is suggested that an 
average for the twelve previous months be estab- 
lished each month in all cases. If this comparison 
shows that the rate in use is running consistently 
above or below the average, a change in the rate 
is justified. 



CHAPTER XXVII 

COST DATA COLLECTION AND PREPARATION 

THE EFFECTIVENESS and reliability of 
operating cost data depends almost entirely 
upon whether or not each item is charged 
accurately to exactly the same account each time 
it occurs. After the classifications have been 
satisfactorily established for the charging of each 
labor, material or burden item, only half the dis- 
tance toward accurate and reliable operating cost 
statements has been covered. 

It is still necessary to establish and enforce 
instructions that will assure correct charging to 
these classifications and accounts. 

It is very unfortunate that this necessity has not 
been recognized in operating cost accounting as it 
has in commercial accounting, where it is the usual 
procedure, when opening a set of books to estab- 
lish certain accounts, and standard practice in- 
structions to insure that certain items will always 
be charged to certain accounts. 

This is not true in cost accounting as yet, and 
we still find in a great number of cases a specific 
item charged to one account one day, week or 

138 



COSTS 189 

month, and to another in the next period. This, 
of course, makes it impossible to make comparisons 
with any degree of confidence and always leaves an 
element of uncertainty in the conclusions drawn 
from an analysis of such cost data. 

This condition only emphasizes the necessity for 
supplying explicit instructions to all individuals 
responsible for the distribution of expense items 
so that after the correct classification of each item 
has once been decided upon, there is no need for 
the exercise of individual judgment. 

The value of this assurance in cases where the 
clerks making the distributions are frequently 
changed will readily be seen. The instructions are 
useful for the education of such individuals, aside 
from their primary value of eliminating the making 
of independent decisions in individual cases, which 
may or may not agree with the standard practice 
and policy of the firm. 

Charts are prepared for blue printing, one 
covering labor items, one covering material items, 
and a third covering burden items. 

On the labor charts, after an analysis of one 
year's labor distributions, including both direct 
and indirect labor, all the various descriptions of 
the labor performed are listed on the left-hand side 
in alphabetical order. This includes descriptions 
considered authoritative for general use, as well as 
phrases in "shop" terminology which are used in 
the factory or plant. 

At the top of the chart are shown, each in a 



140 COSTS 

separate column, the various accounts or classifi- 
cations, both direct and indirect, which have been 
established for the distribution of these labor items. 

If symbols of any sort are used to describe these 
accounts, they may also be shown at the top of the 
various columns. 

Opposite each description of a class of labor, 
under the proper column, is indicated the account 
to which that labor is properly chargeable. This 
is indicated by the insertion of an operation num- 
ber as a sub -classification, if direct wages, and by 
the symbol "X," indicating "Expense," if indirect 
wages. 

The material instruction chart is made in the 
same manner, except, of course, that the materials, 
both direct and indirect, are listed in alphabetical 
order along the left-hand side of the sheet. In 
other respects it is exactly the same. 

The burden expense charts are really complete 
descriptions of the items included in each burden 
account, and show all distribution percentages 
which may be used to proportion such burden 
accounts. 

Beside the value suggested above — their use for 
instructions to insure consistent and accurate 
distribution — these charts have another distinct 
value for reference by all executives and individuals 
who use the cost statements. 

If it is desirable to analyze the total amount of 
an account as shown on the cost statement, it is 
possible, by glancing down the column represent- 



COSTS 141 



ing it, to trace each separate item included. In 
this way the responsibility for, or causes of in- 
creases or decreases, can be traced more readily. 

Back of the prompt publication of a newspaper 
on the date and hour specified, there is a great deal 
which the average reader does not realize. 

Chief and foremost among the factors which go 
to make this prompt publication possible is the 
complete preparation and anticipation of every 
bit of work which can be done previous to the hour 
of issuance of the periodical, leaving for the last 
minute only work that is necessary for the insertion 
of such last-minute news items as must be included 
to make the publication up-to-date. 

Most of us have heard the term "make-ready" 
intimately used in connection with a newspaper 
office. This in itself is an expression of the pre- 
paration, the gathering together of material, and 
the building up of a newspaper by the collection 
and addition of current items. 

We are told that the modern daily paper has an 
immense collection of photographs and lead or 
copper plates of individuals, buildings, vessels, 
cities and places of all kinds, carefully indexed, 
awaiting the time when they may be required to 
illustrate a news item and add the interesting and 
final touch to the story. Some may never be used, 
but they are ready for use if the opportunity ever 
offers. 

If not all of us have seen a newspaper office 
immediately before publication, we have at least 



142 COSTS 



read descriptions of it or seen its portrayal on the 
stage, and have some idea of the spirit with which 
its workers are imbued. We have noted how all 
preparations are made and the climax is reached 
with the feeling of determination that all items 
must be included in the paper but that it must also 
be out on time. 

There is a lesson to be drawn from all this by 
the cost department. Too many times we find in 
the cost department that no work is done in prep- 
aration of cost statements until the time when the 
statements should be issued and that their issuance 
is therefore delayed until all this work is done. 

Data are allowed to collect through an entire 
month until the first of the following month, and 
then only is anything done with them in prepara- 
tion of the statements. Naturally the statements 
are always late and the entire cost staff is working 
one month behind. 

In addition, errors that must be checked back, 
and their causes, are much more difficult to find at 
this late date, and time is taken for them just when 
it is most apt to delay the issuance of statements. 

We advocate complete preparation of cost data 
and material day by day and the performance of 
all work which can possibly be done in anticipation 
of the final development of the statement, leaving 
for the last minute only the addition of the last 
day's data and the necessary recapitulation of 
items, as well as such ascertainments of costs per 



COSTS 143 

unit, etc., as are necessary to make the statement 
interesting, instructive and complete. 

It is, of course, a fact that some of the work of 
developing a cost statement must be left for per- 
formance until after the last day's work has been 
recorded, but it is also a fact that a great deal of 
work can be done during the month toward arrang- 
ing the data already collected for use in the final 
statement. It will be found by many upon 
analysis that a great deal more can be done in this 
direction than they assumed. 

In order to make these preparations, certain 
things are necessary. In the first place the depart- 
ment must be correctly organized, then work 
must be properly scheduled for execution, daily 
distributions of cost and expense items must be 
made, current totals must be kept, comparative 
items must be prepared in advance and standard 
distributions must be established. 



CHAPTER XXVIII 

COST STATEMENTS AND RECORDS 

NOTICE again that busy newspaper office 
just before going to press: Every effort is 
being made to get the latest news into the 
paper in time for printing; each member of the 
staff is striving to prepare his part of this informa- 
tion, so that it will be useful to the public, and in 
its hands as soon after the occurrence of the events 
as possible, doing its utmost to bring this news to 
you promptly, glad to save you a minute. 

The good newspaper prints news on current 
events, arranged with proper headlines, so that 
the most significant information almost stares you 
in the face. 

There are definite hours scheduled for printing, 
and every last scrap of copy must be in by the 
proper hour and minute. The managing editor 
has for his duty, among other things, the respon- 
sibility of looking after the verification of the facts 
to be printed. The news must be reliable. 

Our ideal of a cost department is one organized 
to function like this busy newspaper office. The 
various cost statements it issues, whether daily, 

144 



COSTS 145 



weekly, monthly or periodically, should be planned 
for publication at definite hours and dates, just 
as the newspaper is planned. 

As in the newspaper, also, the information these 
statements contain should be the latest news on 
costs, brought up-to-date as closely as possible to 
the publication hour or day. 

They should be arranged like the newspaper, so 
that the most important and significant points can 
be ascertained first and quickly, and further details 
can be secured if desired. 

It is, of course, essential that the cost news be 
reliable, and this is probably where many cost 
statements, like not a few newspapers, fail to give 
satisfaction. Our ideal cost statements, like our 
favorite newspaper, must be published regularly, 
and on time. In this day of highly developed 
journalism we would hardly dare to be found read- 
ing a newspaper twenty-four hours old. Every 
executive reads reports of all descriptions that are 
published in his favorite periodicals. This news 
may cover his favorite pastime, sport or hobby, 
and the subjects in which he is most interested, or 
it may refer to matters in which he has only a pass- 
ing interest. In all cases he demands that it be 
reliable, complete, prompt, up-to-date and regular. 

Why should he not take the same interest in 
news about that which is his highest interest — his 
business? And why should he not demand the 
same degree of reliability, promptness, regularity 
and accuracy? 



146 COSTS 



Some may argue that cost statements are, at 
best, cold and uninteresting. We suggest that 
they can be made interesting by comparisons of 
various kinds, and by indicating connections with 
live operations, occurrences and events. 

Cost statements properly prepared are inspira- 
tional, reporting accomplishment, and urging on 
to still better results. They can give much pleasure 
to the man who is really in the game. They can 
give the satisfaction in achievement, the encour- 
agement to success and the guidance for future 
activities. 

Unfortunately they may, if sufficiently neg- 
lected, report many a pathetic and pitiful situation, 
and even a tragedy. Therefore, our comparison 
of the cost statement to the newspaper. 

The value of cost statements increases or de- 
creases in proportion as they are much or little 
used. Only too often are they considered merely a 
record of certain monetary transactions, or a 
verification of various expenditures of money. It 
is true that they record and verify these expendi- 
tures, but they record only to build the foundation 
for a series of analyses and comparisons, and verify 
only to insure accuracy in the data used. When 
correctly used they do more than all this; they 
plan, guide, help to control and finally show a 
report of results accomplished. 

There are vast numbers of more or less complete 
and instructive cost statements passing into obliv- 
ion month after month, carrying with them 



COSTS 147 



inestimably valuable lessons for future guidance. 
A part or all of their value is absolutely lost 
because they are considered simply a record of past 
performances which cannot be changed and, there- 
fore, deserves no further consideration. 

Another point to be considered is the average 
executive's lack of time to use these cost statements 
for all they are worth, and benefit by the lessons 
they hold, even where their value and importance 
is realized to the full. 

We should remember, then, that in the collection 
and recording of operating cost data and in the 
development of the cost statements, in order to 
make them valuable, the work must be done in 
such a way as to invite, incite, encourage and 
facilitate the use and analysis of the data secured. 

There can be no doubt that in every industrial 
or commercial enterprise the very nature of the 
business necessitates concentration on some details 
more than on others, in order to maintain satis- 
factory control. It is also true that greater reduc- 
tions in costs are possible in some localities and 
divisions of manufacture than in others. There 
are many cases where the management is particu- 
larly interested in some points more than in others. 
These various points and details which need special 
attention and are particularly interesting may be 
certain plants, departments, operations, methods, 
products, men, etc., all of which can be expressed 
and described in quantities and values in the cost 
statements. 



148 COSTS 



It would seem logical, therefore, in order to 
invite, incite, encourage and facilitate the use of 
cost figures, to localize expenses and develop com- 
plete, accurate, reliable and concise records and 
data on various expense items in the order of: 

1. Their necessity for satisfactory control and 

management 
%. Their value in the work of cost reduction 
3. The interest exhibited in them by the man- 
agement. 

A study of conditions will generally point out: 

1. Which data should be collected and recorded 

2. Which figures should be prepared most com- 
pletely and be ready for instant use 

3. Which items should be regularly and consis- 
tently placed before the executive in charge 

4. Which information should be tabulated con- 
tinuously and which may be secured only at 
intervals 

5. Which items should be analyzed and divided 
into their most minute components and those 
which may be recorded as a whole. 

Any work done with such study and on such an 
outline should result in a set of statements and a 
series of files of indexed cost data, in various 
degrees of completeness, adaptability and availa- 
bility, from which that information which is most 
necessary and most frequently desired can be 
immediately secured, and all other data obtained 



COSTS 149 



with an ease in proportion to the frequency and 
extent of its use. 

It will often be found that owing to changing 
conditions some details may need more attention 
for a short time than is usual ; the method used in 
collecting and assembling cost figures should be 
flexible enough to allow for such concentration 
without interfering with or detracting from the 
essential comparison of all other necessary items 
or the effectiveness of the whole. 

It should always be remembered that the man 
who is to use this data is usually an exceedingly 
busy person, and probably one of the most essential 
things is simplicity in the form in which it is pre- 
sented. For no matter how complete, comparative 
and prompt the statement, it has no value unless 
it is sufficiently studied and analyzed. 

Statements can often be simplified and made 
more descriptive by showing average unit figures, 
costs per hour, or costs per ton for instance, or by 
showing percentages of one item to other items to 
which it has relative importance. The form in 
which the statement is made up should be con- 
sidered: shall the figures run the length or width 
of the paper, shall all information regarding a cer- 
tain operation be concentrated on one sheet rather 
than spread over a number of sheets, shall most 
important items stand out clear and separate from 
less important ones? 



CHAPTER XXIX 

GETTING STATEMENTS OUT ON TIME 

WE HAVE said in previous chapters that the 
spirit and ideal of the newspaper publish- 
ing office can be used to great advantage 
in a cost department. We have compared the 
cost statement to the newspaper; its contents are 
good only when issued as soon after the occurrence 
of the event as possible. We have suggested that 
both must have their headlines or summaries and 
that both must permit of further investigation 
into details. 

In this chapter we propose to make several sug- 
gestions which, if they can be practically applied, 
will enable the cost statement publisher to get out 
his cost news on time and regularly. 

First, we must assign definite duties and respon- 
sibilities to each member of the organization. 
Imagine the difficulties of a fair-sized newspaper if 
there were no assignment of duties and responsi- 
bilities as to the various kinds of news. Probably 
the greatest factor in the successful and prompt 

150 



COSTS 151 

publication of the larger newspapers is the com- 
plete departmentalization and the definite assign- 
ment of responsibility to individuals for material 
in each department. 

So each cost accountant should analyze the kinds 
of facts which his department must collect and the 
various methods which are used to collect them. 
After he is satisfied that there is no duplication of 
work — and he may be surprised to find a great deal 
of it — and that correct methods are being used, 
he can definitely make each individual in the 
department responsible for certain specific work 
and the collection and keeping up-to-date of 
particular data. 

This is neither more nor less than the application 
of several of the most successful principles of 
scientific management, setting the task, planning 
the work and defining responsibility. 

This process usually results in: 

1. The elimination of duplicate work 

2. The improvement of methods 

3. The development of a regular schedule of 
issuance of all cost data in statement form 

4. The actual issuance of statements on schedule 
time. 

In order to establish this schedule and enforce 
it, one organization has found very effective the 
use of a monthly chart. 

In establishing the schedule, the work is first 
definitely assigned to individuals, apportioned so 



152 COSTS 



that it is evenly distributed and taxes no one with 
more than he or she can do. 

Another point which should be watched is the 
course work travels from one desk to another. As 
far as possible the work of various desks should be 
arranged so that the progress on one does not 
depend on another unless there is a reasonable 
certainty that the flow of work will be steady and 
without interruption. 

After the schedule has been so established, the 
chart is made out. 

The names of all individuals in the department 
are listed on the left-hand margin. Immediately 
following and continuing down line for line are 
listed the various items of work or "tasks" for 
which the individuals are responsible. A horizon- 
tal line is devoted to each task. Following the 
description of the work to be done, a series of 
vertical lines are drawn one after another to the 
extreme right-hand edge of the chart to provide 
thirty-one squares, one for each day in the month. 

It is assumed that unless otherwise noted each 
task is to be performed daily. As the work is 
performed the symbol X is inserted in the square 
representing the day and on the line following the 
description of the work. The letter O is inserted 
for Sundays or holidays unless records for such 
days are to be collected. 

If any task is to be performed periodically, a 
horizontal straight line is drawn through the square 
or squares representing the day or days on which 



COSTS 153 



it is to be performed. When the work has been 
done the symbol X is marked in the square over 
this line. 

If on account of delays of any kind the individual 
to whom the task has been assigned cannot perform 
it as required, and another person is temporarily 
assigned, the latter's initials are shown in the 
square instead of the symbol X. 

The chart is made about 18 inches wide by 24 
inches long, with about % inch squares. It is 
posted on the wall and each individual is responsi- 
ble for marking up his record. 

The advantages readily will be seen. First, the 
work of the entire department is charted so that it 
can be studied as a whole. Second, by referring to 
the line of squares under the current date, the 
condition of the work of each individual can be 
noted at any time and plans for remedying retarded 
work can quickly be made. 

The ideal condition is to have the squares follow- 
ing each line up to yesterday's square filled with 
X's. If this is not the case, the exact number of 
days behind on each kind of work can be seen at 
a glance. 

The accomplishment of each individual can be 
judged by the number of squares showing initials 
rather than the symbol X. 

Work scheduled to be performed periodically 
other than daily is never lost track of. 

There was a time when the last day of each 
month was a day to be dreaded. Every member 



154 COSTS 



of the bookkeeping, accounting and cost depart- 
ments saw it approach with a knowledge that it 
meant hard work, overtime, and a monotonous 
routine of finding errors and locating their causes, 
and saw it pass with relief. 

Fortunately, this is not now so universally true, 
although it still occurs in enough cases to make it 
worth consideration. 

Mechanical accounting and office devices have 
done much to overcome this difficulty and we are 
indebted to their producers for the relief from this 
"end of the month" burden, either directly by the 
use of their equipment or indirectly because their 
sales and advertising activities have influenced us 
to a more intensive study of the problem and more 
earnest attempts to seek our own solution. 

As a result of all this activity, and of a distinct 
principle advocated by the office equipment pro- 
ducers, there stands out prominently at least one 
standard practice which has been generally applied 
with success. 

This is the keeping of current totals on all data 
in preparation for use at the end of the month; in 
other words, complete each day as far as possible 
all calculations and computations, so that the last 
day of the month, as far as current work is con- 
cerned, will be no different from the rest. 

Under the old regime items for debit or credit to 
various accounts, either for accounting or cost 
purposes, were listed or posted, sometimes daily 
under the better systems, and under the worst were 



COSTS 155 



merely allowed to pile up so that the information 
had to be literally dug out of a mass of data after 
the close of the month. 

The newer practice, however, has proved that 
this is an unnecessarily burdensome method and 
that particularly with the aid of mechanical 
devices every item can be credited or debited to the 
proper account, and the total be secured each day. 

The writer has known this to be a practice in 
operating cost work where upwards of nine hun- 
dred different accounts are carried, covering wage 
and material cost as well as production records. 

When it is necessary to show the daily total as 
well as the current total to date this is done, but 
when unnecessary, the total for the day is merely 
added or subtracted from the previous current 
total and the resulting current total is shown. 

It is possible, of course, to devise checks that will 
insure accuracy and make it unnecessary to show 
each step in the work. For instance, a total of 
daily payroll totals to date can be checked with the 
total of all current totals of the various direct and 
indirect wage accounts. 

There are many advantages in this newer 
method. In the first place, as indicated above, it 
eliminates the end of the month congestion. When 
the last day of the month arrives it is merely neces- 
sary to add the last day's work to get a monthly 
total for use in the compilation of the monthly 
cost statements. 

By the use of various checks, as instanced above, 



156 COSTS 



errors are caught and corrected daily, and at the 
expense of much less worry and work than if left 
to the last minute. 

There is another distinct advantage in current 
totals. Daily or weekly statements can be issued 
showing information totaled up to date for the 
month. This stirs up a certain amount of interest 
particularly when they are compared with similar 
periods in previous comparable months. Further, 
this interest is created when time still remains to 
do something constructive to improve the cost 
accounts or production items that do not compare 
favorably. 

The monthly cost statements can be issued days, 
and even weeks, earlier than under the old plan, 
and are, therefore, more valuable for use. Cover- 
ing recent activities, they can be more intelligently 
studied, and are productive of better results. 



CHAPTER XXX 



SYMBOLS AS AN AID 



TO MINIMIZE the labor and simplify the 
operations necessary to secure records, de- 
scriptions and instructions, several different 
methods of symbolizing by operation, equipment, 
department, product, etc., have been devised and 
put into successful use. 

Chief among these methods are found three 
which will be briefly described. 

The first method, known as the mnemonic 
symbol system, consists of devising combinations 
of two or more letters which suggest at sight the 
various departments, operations, machines, etc., 
but which are descriptive and original enough to 
avoid being mistaken for one another. For in- 
stance, the accounting department may be sym- 
bolized by ACC, the production department, 
PRO, and the purchasing department, PUR. The 
number of letters in the symbols distinguish be- 
tween classes. In other words, operation symbols 
may have two letters, department symbols, three, 
equipment symbols, four, etc. 

This system is effective and simple where it is 
adaptable, inasmuch as no key is necessary in its 

157 



158 COSTS 

application. Its disadvantage is that where there 
are many classes or many items in each class, five 
or at the most six letters are needed to make each 
symbol original and comprehensive enough. Thus 
it becomes cumbersome, complicated, and con- 
fusing, and soon resembles "red tape." 

The second and better-known method is the 
purely numerical or alphabetical system with all 
its combinations of the figure or letter. Possibly 
the most popular combination is the alternate 
letter and figure. For example, the first letter may 
represent the department, the number the opera- 
tion, and another letter the expense classification, 
as material or labor. Another adaptation of the 
numerical symbol is that known as the decimal 
system, in which the position of a figure denotes 
its class. Thus 103 might represent the third 
expense account chargeable to department number 
one, and all accounts chargeable to this department 
would be represented only by symbols of numbers 
between one hundred and two hundred. 

These methods employ a key, and if allowed to 
develop into complicated combinations, become 
very much harder to remember than the mnemonic 
or suggestive symbol. 

The third and most effective method combines 
the two systems already described, using the 
mnemonic system until the symbol becomes too 
large, and then adding numbers or alternate num- 
bers and letters, before or after, for other classes 
or further variations in a class. Thus the burden 



COSTS 159 



labor account chargeable to assembling in the 
fourth department in a plant might be symbol- 
ized BL4AS. 

The use of symbols greatly facilitates the collec- 
tion, recording and filing of cost data, and greatly 
aids comparison and analysis. It is advisable 
wherever practicable. 

No two sets of symbols are exactly alike, and 
many original and effective combinations can be 
devised to fit the individual case. 

Symbols represent in cost finding what stenog- 
raphy does in present-day correspondence. 

In the first portion of this article several systems 
of symbols have been briefly described and it 
remains only to point out the items to which one 
kind or another can be applied in the building of 
an operating cost statement: 

Plants and Buildings 

Departments and Sub -departments 

Workmen 

Machines and Equipment 

Operations 

Materials 

Supplies 

Product 

Expense Accounts Labor 

Expense Accounts Materials 

Expense Accounts Burden 

In devising symbols for these items it is advisable 
to place those characters first in the symbol which 



160 COSTS 



represent the main items and accounts and then 
follow with those representing the sub-divisions. 
This will help to make the relation between the 
various symbols comprehensive, and will aid in 
memorizing them. 

It is also necessary to keep in mind the inevitable 
additional items to be symbolized and to allow for 
sufficient expansion. 

The introduction of a symbol system should be 
deferred until it has been very carefully studied and 
developed; once it is applied, the fewer changes 
made in it the better. 

In consideration of the development of electric 
tabulating machines it is recommended that con- 
sideration be given to the establishment of symbols 
by the numerical unit plan in which certain speci- 
fied unit figures are set aside for the various desig- 
nations. The manufacturers of any of the tabulat- 
ing machines will be very glad to help in the 
definite development of this plan. 



CHAPTER XXXI 



GRAPHIC PRESENTATION 



IT HAS been said that the eye is the window of 
the mind. Since in all our daily use of informa- 
tion and data relative to our management 
problem we are anxious to bring it into our mind 
as promptly as possible, it is natural that we 
should apply to this problem the best means to 
convey this information through these windows. 
Hence we turn to the new developments in graphs, 
charts and the various means of presenting relative 
data in picture form, for real assistance in so doing. 

No matter how complete and detailed cost 
statements are, their presentation can be much 
improved through the use of graphs. In fact the 
more detailed they are, the more valuable the 
graphic presentation of outstanding items. Graphs 
are to cost statements what illustrations are to a 
newspaper. They enliven otherwise dull reading 
matter. They emphasize given points. They 
demand attention on strikingly comparative items, 
and have many other distinct advantages* 

Costs are valuable only in proportion to their 

161 



162 COSTS 

use. This means that it is desirable to bring their 
lesson forcibly to everyone concerned. Graphs 
offering a simple method are understandable to 
minds which could never grasp the complexities of 
long, detailed cost statements. 

Since the aim is to bring the picture to the mind 
as quickly and as comprehensively as possible, and 
inasmuch as in charts and graphs a great deal of 
information is concentrated and clearly portrayed 
in a small space, a picture remarkably comprehen- 
sive in details can be brought directly to the mind 
through their use. 

Ideals of good cost presentation are comparison, 
relativity, proportion and ratio. Graphs properly 
scaled bring out these comparisons and proportions 
in a manner which cannot be done in any other 
way. Take, for instance, two items, one $438.96, 
the other $274.35. Compare them as set down in 
numerals. Now draw a line two inches long repre- 
senting the first, then another one and one-quarter 
inches long representing the second. Note the 
immediate sense of proportion and ratio you get 
from these two simple lines, which no end of 
gazing at the two figures would give you. Graphs 
do facilitate these comparisons. By wise use of 
colored lines, different types of lines, and shadings, 
comparisons and distinctive relationships can be 
easily shown which it would take the mind no end 
of time to assimilate from tabulated statements 
of figures. 

Most executives abhor detail; of course, there are 



COSTS 165 

those who have a great eye for it, but as a general 
rule it is irksome. Those executives will get more 
from a glance at a chart than they can ever hope 
to get from a list of figures, and what is more 
important, they look at the chart or graph while 
they would shuffle the statement around until it is 
finally filed in the last drawer of their desks. 

In the routine of our work we are all inclined to 
get into a rut, even as to the dollars and cents 
results in our business. If the story is told us in 
cold black numerals, in variations of only ten 
characters, we may find it difficult to detect even 
the most startling facts. Graphs offer opportunity 
for emphasizing noteworthy and startling facts 
vividly by use of no end of colors and characters, 
and force the lazy minds of many of us to "stop, 
look and listen" at the danger signs. 

Graphs also offer a means of overcoming the one 
real objection to the wide publication of cost data 
so often desirable in order to inspire and maintain 
the interest of the largest possible number of 
people who can affect costs in a plant; this is the 
reluctance on the part of many chief executives to 
give out cost statements in terms of dollars and 
cents for fear of abuse of the data thus confiden- 
tially issued. Graphs indicating relative lines can 
be issued generally, while keys can be furnished 
only to those who are especially trustworthy, who 
can in turn interpret only to those who are sure 
never to abuse the confidence placed in them. 
Graphs in simple form spell real human interest to 



164 COSTS 



many who would hardly ever be stirred by cold 
figures. 

Among many items that graphs can be drawn 
to show are the following which offer a suggestion 
of their wide scope: 

Operation costs 

Expense items of all sorts by classes, totalled 
and in groups 

Unit production costs 

Hourly burden rates 

Burden percentage rates 

Material costs by units or classes 

Actual items as compared with standards set or 
budgets 

Any items compared by days, daily and to date, 
monthly compared with previous months, 
averages of all sorts, compared with previous 
monthly averages and, of course, annual com- 
parisons of all sorts 

Departmental comparisons 

Wage rates by operations, departments and 
classes 

Machine hour rates by classes and groups. 

Beside all the above there are dozens of items 
regarding production progress which can and 
should be shown graphically. 

Ingenuity will point the way to many interesting 
developments in the way of graphic presentation of 
cost data. As a matter of fact it is recommended 
that the means of presentation be changed every 



COSTS 165 

so often if for no other reason than to attract 
attention at certain desirable times to specific 
data. 

Beside their use in the publication and presenta- 
tion of costs, graphs and charts will be found useful 
in facilitating the collection and compilation of 
cost data. For instance, machine hour rates, 
burden percentages and wage rates can be made 
up in chart form from which totals can be easily 
picked and used. 

They are also valuable in the development of 
standard practice instructions in showing the pro- 
cedure of forms, the routine of classification and 
distribution, the responsibility for costs. An 
interesting experiment was made in this connection 
by co-ordinating the organization chart of a plant 
w T ith the entire cost classification, tracing respon- 
sibility for each class of cost to a given individual 
in the organization. The analysis thus provided 
was valuable and fruitful. Charts and graphs 
have all the advantages for instruction purposes 
that were enumerated as those attendant on the 
publication of cost facts in other forms. 



CHAPTER XXXII 

THE COST DEPARTMENT ORGANIZATION 

MUCH HAS been written and said about the 
cost of keeping costs. Varying statements 
have been made as to the number of people 
necessary to collect costs and keep records of 
production for different numbers of workmen. 

Unfortunately, these figures have little signifi- 
cance, since, in the first place, cost principles are 
far from standardized, even in a given industry; 
in the second place, the functions and responsibili- 
ties of the cost department vary in different organi- 
zations, and are, therefore, hardly comparable; and 
finally, the methods of performance are so dis- 
similar that it is difficult to draw any conclusions. 

The matter of principle consideration in this 
discussion is not so much the question of how much 
it costs to collect data for a given concern or a 
given number of men employed, but rather what 
returns are received from the money expended for 
this purpose. 

Cost records can be secured for almost any 
amount that a company is willing to spend, but 
it must be understood that they will vary in 

166 



COSTS 167 



accuracy and completeness in proportion to the 
amount invested. As in everything else, it costs 
money to have work done right. 

Therefore in deciding upon an organization for 
the collection of cost records it should not neces- 
sarily be considered on a basis of how many persons 
are used by some other company employing ap- 
proximately the same number of men, but rather 
what work is necessary in order to obtain a definite 
cost service, developed to the degree of accuracy 
and completeness justified by an intelligent esti- 
mate of probable returns from the preparation and 
use of this data, and established after a careful 
study of requirements. 

There are then two extremes to be guarded 
against. There is the danger, first, of economizing 
to such an extent that the information collected is 
so inaccurate and incomplete as to make it useless, 
and the money spent, however little, wasted. 

There is the second danger of amassing data and 
tabulating figures in so large a volume and to such 
a degree of accuracy that they become burdensome, 
full of duplication, difficult to use and, therefore, 
discouraging to use, wasting at least a portion of 
the money spent. 

We suggest that every manager and executive 
responsible for the accumulation of operating cost 
data examine his cost organization from these two 
angles, remembering always that cost information 
is not collected for the joy of collecting it, but for 
the use that can be made of it. 



168 COSTS 

There is, however, one valuable and necessary 
quality of cost data which varies not so much with 
the amount of money spent on the work, as with 
the method of organizing the work; in other words, 
through the correct assignment of duties rather 
than through the expenditure of more money. 

This is the immediate availability of the infor- 
mation, or its "up-to-dateness." We believe, in 
fact, that it costs more not to have data up-to-date 
than it does to have it so. And furthermore, this 
is a feature which has but one extreme to be 
guarded against — the danger of not doing it 
enough. It can hardly be overdone. 

In organizing for this purpose there is at least 
one rule which can be followed to very good advan- 
tage. This is the separation of the work of current 
collection of the data from that of periodical 
tabulation. 

For instance, if the individual or group respon- 
sible for the daily collection of data is also responsi- 
ble for the making up of the monthly statements 
at the end of the month, one or the other will suffer, 
with the result, under either alternative, that both 
the current and periodical records run behind and 
are stale and less valuable when tabulated. 

If studied carefully, the organization can usually 
be arranged and the work assigned so that these 
two functions do not interfere with each other. It 
should be possible to do each day all necessary 
tabulating of the previous day's records, and to 
continue it uninterruptedly at the close of the 



COSTS 169 

month or other period when cost statements are 
made up. 

Where possible it is usually desirable to have 
these two functions performed by different individ- 
uals or groups. However, where the total work 
to be done under both functions is small and really 
amounts to no more than enough for one individ- 
ual, the work should be arranged so that a definite 
part of each day is spent on each function, in order 
to keep all data, both current and periodical, as 
up-to-date as possible. Or still better, these two 
kinds of work might be executed by two individ- 
uals, each spending part of a day on this work, 
and part on other duties. 

When the force is large enough to require the 
supervision of a head or chief cost clerk, it will 
usually be found desirable to assign the periodical 
development of statements to him, and to leave 
the majority of the general group free to uninter- 
ruptedly continue the current collection and 
preparation of information for his use. 

We stated earlier in this chapter that we believed 
it costs less to keep cost data up-to-date than not 
to do so. At least one logical and obvious argu- 
ment will help to substantiate this statement. 
Cost information must be checked for errors if it 
is to be correct. Where it is tabulated promptly 
it is certainly very much easier to detect and cor- 
rect errors, and thus to save work which is in itself 
a very costly part of the preparation of operating 
cost data. 



CHAPTER XXXIII 



THE COST ACCOUNTANT 



WE ARE often asked the question — ''What 
kind of a man makes the best cost account- 
ant?" We will attempt to point out 
certain requirements as well as certain other 
desirable qualifications. 

Great progress has been made in operating cost 
accounting during the last ten years, until this 
function now holds a much more important posi- 
tion in the industrial organization than heretofore. 
This has, of course, made it necessary to use a 
higher type of man for the development and main- 
tenance of the work. 

Time was when a clerk of little more than ordi- 
nary intelligence could qualify for cost accounting 
work, provided he was accurate at figures, wrote a 
plain, legible hand, and had an aptitude for detail. 
The modern cost accountant, however, in order to 
fully handle our modern cost systems, and get the 
biggest results from them, must have in addition 
to these qualifications, which are of minor impor- 
tance in these days of highly developed mechanical 
computing and typewriting equipment, many other 

170 



COSTS 171 



very important qualifications. Let us consider 
them in sequence. 

In the first place he must be more than an ordi- 
nary clerk. He should have a broad viewpoint. 
He should possess executive ability. Modern cost 
accounting requires that the accountant deal with 
executives in the organization on a more or less 
equal basis. He should be able to make others 
recognize his position in its correct importance, 
and be able to maintain it in its relation to other 
functions in the industrial organization. He is 
usually required to supervise the work of one or 
more assistants and clerks. 

He should by all means and probably above all, 
be analytical. Analysis of cost data for its use in 
guidance and control has in itself been a leading 
factor in the elevation of cost accounting to its 
present position of importance. The cost account- 
ant should, therefore, have the ability to analyze 
cost information until he has brought to light every 
pertinent fact and exhausted every possible means 
of securing further knowledge from the available 
records. 

This requirement is probably the main reason 
that so many members of the engineering profes- 
sion have been successful in this field, not because 
of specific engineering education, particularly, but 
because they have been trained as a rule to analyze 
to minutest detail. 

The cost accountant must also be aggressive and 
progressive, because it is often necessary to first 



172 COSTS 



force the collection of certain cost records, and 
then force the use of this information on those for 
whose guidance it is provided. 

He should have considerable initiative and orig- 
inality, inasmuch as a great many of the facts 
presented should come from him unsolicited. He 
should have a talent for comparison, because 
through comparison all operating cost data is 
made more effective. 

He should be resourceful, inasmuch as he may 
often be required, or himself find it necessary, to 
provide certain data different from or in addition 
to regular statements. Unless he is awake to every 
opportunity and can get the most out of available 
records, he may either do much unnecessary work 
or fail to secure the information altogether. 

He should have imagination in order that he 
may visualize and understand the conditions which 
are portrayed by the cost data which he develops. 

He should have constructive ability because the 
cost statement is really a structure built upon the 
foundation of correct unit cost figures. 

Other essential qualifications are an appreciation 
of values, reliability in limiting the use of impor- 
tant information to those who are authorized to 
use it, orderliness, and finally, loyalty and honesty 
so that he will bring up facts regardless of where 
praise or blame may fall, without permitting per- 
sonal prejudice or preference to influence him. 



CHAPTER XXXIV 

RELATION BETWEEN COST AND 
EFFICIENCY DEPARTMENTS 

THERE is still a great difference of opinion 
as to just how cost work and research or 
efficiency work are related. In some organi- 
zations we find two distinct divisions, entirely 
separated, handling these two functions, while in 
others they are at least related sufficiently to 
insure co-operation. 

We will first briefly outline our understanding of 
the purposes of these two functions. 

Cost finding proposes to record information, 
first as to actual production and second as to 
classified costs of production. 

This information is tabulated as to men, ma- 
chines, operations, departments, classes of com- 
modities, kinds of products. Such tabulations 
should be complete, in that they cover every item 
of expense, and, therefore, can be collected only 
in sufficient detail to permit of their practical use. 

Even in the most completely developed cost 
system, therefore, it is impossible and impractical 
to have intensive analysis. 

173 



174 COSTS 



Research and efficiency work, particularly that 
section which has to do with standardization of 
equipment, methods and processes, attempts to 
record data as to production, as well as costs, in a 
way similar to that done under cost finding. Also, 
it is usually found necessary to classify this data 
as to men, and machines. 

Up to this point a distinct similarity will be 
noted. However, the difference lies in the fact 
that in order to successfully carry on the efficiency 
researches it is necessary to tabulate this informa- 
tion from very minute records. 

Because of the possibility in this work of separat- 
ing a given operation, process or item of expense 
from all others and studying it for a short time, it 
is possible and practical to secure very detailed 
and intensive analyses. 

If we are correct, therefore, are we not justified 
in a further statement that efficiency research work 
is after all only an intensive cost-finding or vice 
versa, that cost finding is merely a generalized 
efficiency research? 

There is a distinct necessity for both, for while 
there is a similarity in the work they perform, there 
is an absolute difference as to the results they 
should obtain. 

Briefly, cost work offers a continuous general 
control of all items indicating possibilities for 
general improvements. Efficiency research work 
offers an intensive temporary control of one or a 
few items indicating possibilities for great and 



COSTS VY5 

complete improvements, and better still, stand- 
ardization. 

Both classes of work are statistical by nature 
and require for their performance individuals with 
similar ability and qualifications. 

With all the above true, it is our opinion that 
there is a distinct advantage in arranging these two 
functions of control so that the work of each can 
be arranged to facilitate the work of the other, and 
to secure the maximum value from both. 

For instance, cost records, if arranged with this 
ideal in mind, can usually be tabulated so that 
they offer the efficiency man a very complete 
foundation for his intensive tabulations and re- 
searches covering a given operation. 

In like manner the efficiency man in making his 
intensive research of a given operation, if he keeps 
in mind the requirements of the cost division, can 
secure information which will promote the develop- 
ment of analyses in that division. 



CHAPTER XXXV 

USE OF COSTS FOR CONTROL 

WE WILL soon look backward to the time 
when cost data, especially operating cost 
information, was considered a luxury 
rather than an essential; something nice to have 
but which we could easily get along without. 
Manufacturers are fast realizing the absolute 
necessity of reliable factory costs, storekeepers 
are delving into their operating expenses, and many 
executives are considering cost statements their 
most important tools. 

That costs have many varied and important 
uses is therefore evident. Just how valuable they 
are in each organization depends upon the particu- 
lar circumstances, but in a general way we can 
classify the principle uses of cost data under four 
headings as follows: 

1. Cost and Production Control 

2. Standardization 

3. Financial 

4. Pricing and Sales. 

By control we mean the watchful management 
and supervision of all factors affecting the opera- 

176 



COSTS 177 

tion of a factory or plant, in a manner that will 
not allow any increase in cost of operation over 
previous cost of operation under similar conditions. 
To properly control, the executive should know 
exactly what circumstances have made an in- 
creased cost necessary or a decreased cost possible. 

To be able to control in this manner we must 
have available for careful analysis cost statements 
explaining operating conditions of previous periods, 
and resulting operating costs, and the same infor- 
mation regarding the current period. In other 
words, we must know what has been, what should 
be, and what is. 

We often note with regret hesitation of some 
executives to furnish the subordinates, upon whom 
they depend for control, with the information 
which points out the results of such control. 
While we realize the importance of using dis- 
crimination in divulging the tell-tale figures of a 
business, we do believe it is essential that enough 
information be given each man in executive control 
of any operation to permit him to intelligently 
handle his work. This should always be possible. 
Often it may be done by furnishing information 
which, although complete for the particular depart- 
ment or section in which the subordinate is inter- 
ested, does not alone give the complete descriptive 
data regarding the business as a whole. 

If a man is not considered trustworthy enough 
to receive data on the result of his expenditures, 
he is not good enough to make such expenditures, 



178 COSTS 



and we emphasize again — tell the man what has 
been, what should be and what is regarding that 
which he controls. 

Statements and cost data for use in controlling 
costs should be arranged so as to point out easily 
and quickly just w^hich individual, group or depart- 
ment is responsible for each item. This is neces- 
sary to allow the executive to take appropriate 
action with a unit when an item shows an unneces- 
sary increase. Every item of cost and expense 
should be easily traceable to its origin. Files 
should be available with all data from which cost 
statements have been compiled, to permit the most 
thorough analysis when this is found necessary. 

Inasmuch as much of this analysis is made by 
comparison, statements should be profusely illus- 
trated by comparisons, although not to an extent 
that makes them complicated and too difficult to 
study. For instance, comparisons using a month 
as the period of the statement, can be made of the 
present and the preceding month, of the present 
month and the same month last year, or of the 
present month and the average of any preceding 
group of months. The value of comparisons 
should not be underestimated. 

That the control may be most effective, cost 
information should be furnished as soon as prac- 
tical after the occurrence of the operations it 
covers. An executive can work best with live 
data. Certain information is available each day 
on the preceding day's work. If such information 



COSTS 179 

is useful for control, it should be furnished daily. 
Other items are available weekly and monthly. 
They should be compiled and issued for use 
promptly. 

Whatever the means, cost information, and 
especially that used for control, must be presented 
in as simple and descriptive a form as possible, so 
that it can be quickly and thoroughly studied and 
analyzed. 

The method of applying this knowledge to the 
problems of cost reduction varies to a certain 
degree with the type of organization. In all 
organizations, the executives who control costs 
should also use all available cost data to aid them 
in deciding upon changes necessary to lower costs. 
We find, however, in the new type line and staff 
organization developed under scientific manage- 
ment, a separate and distinct staff of men usually 
termed the efficiency or betterment department, 
provided in addition to the line executives, to 
specialize on cost reduction. It is probably be- 
cause of the fact that these men found it absolutely 
essential, in the accomplishment of their work, to 
obtain accurate, reliable, prompt and complete 
information regarding past and present costs of 
operations under various conditions, that operating 
cost accounting has in the last few years properly 
taken its place as one of the essential factors in 
good business practice. 

If it is found after careful study that costs com- 
pared by the same correct unit vary greatly by 



180 COSTS 

periods, being high at one time and low at another, 
it is logical to believe that if conditions had been 
uniformly correct the costs might have been at the 
low level during all periods. An investigation 
should be made to discover what was responsible 
for the high points and steps should be taken to 
prevent the recurrence of the causes if possible. If 
they cannot be eliminated entirely, it may be pos- 
sible at least to reduce them. 

Often it is possible to compare costs of operations 
of a similar nature. It may be found that an 
operation is being performed in one department 
under certain conditions more cheaply than the 
same operation in another department under dif- 
ferent conditions. Steps should be taken to cor- 
rect such conditions. Even where operations are 
not exactly the same, they may be compared when 
carefully analyzed and the correct proportion of 
the costs of one to the other may be determined. 
If this proportion is not correct, further investiga- 
tions should ensue, and action should be taken to 
make it right. 

Operating cost data shpuld also be arranged so 
that they quickly and accurately point out the 
results of changes made in the various operations. 
After all, the acid test of all work for cost reduction 
is the cost statement which shows whether or not 
the work has had the desired effect. If not, it 
should be known at once so that further investiga- 
tion, study, and effort can be applied. If it has 
been effectual, this should also be known imme- 



COSTS 181 



diately, for knowledge of results accomplished acts 
as a stimulus to further efforts. It sustains inter- 
est in the work and makes it a game with the cost 
statement as the score, and the contestants ever 
striving to improve upon their previous records. 

Because of the use to which costs are put, data 
above all other things must be truthful. There 
should be no opportunity for deception either as to 
the success or failure of changes made in operating 
conditions. The knowledge that the cost state- 
ment will truthfully and fully show the results, 
encourages and in fact makes absolutely necessary 
a careful and analytical consideration of all pro- 
posed changes before they are put into effect. 

Deliveries at any cost ! This is the cry from all 
directions just as soon as prosperous conditions 
obtain in ' business. The sales department, the 
jobber, the wholesaler, the retailer and the cus- 
tomer all join in a chorus with this as the theme. 
It is logical and natural that they should. At such 
times sales usually depend entirely on the amount 
of material which can be delivered in or by a given 
time. To make such deliveries these materials or 
products must be produced by the given dates 
and thus it becomes a production department 
problem. 

With this problem confronting it, with pressure 
being brought to bear on all sides and with no 
limitations set as to costs, is it right for the pro- 
duction department to take up this cry and make 
it a basis for future execution of work at any cost? 



182 COSTS 



Emphatically — no! Even if it attempted to set 
aside all consideration of costs it would not find 
this a solution. Money itself cannot always solve 
the problem of time. This is probably the one 
great lesson which operating and production cost 
data have taught the production department. 

And when money can solve the problem; when 
by the addition of new buildings or new equipment 
or new men the production can be increased, is it 
correct to spend this money until consideration 
has been carefully given to the effect of this ex- 
penditure on costs generally, not only during 
present conditions, but also during the period 
which the future will surely bring, when conditions 
will be normal, or, worse still, below normal? 

Good business conditions may last a month or a 
year, but the future has no ending and it brings 
uncertainty. 

Therefore, the conservative and careful execu- 
tive when considering deliveries and possible 
expenditures to secure such deliveries, carefully 
notes the effect on present and future costs. He 
does not disregard cost at present because he feels 
entitled to at least as good a profit as was obtain- 
able before. He does not disregard future costs 
because he knows that if he does so now they will 
inevitably come to the foreground when conditions 
change. 

He, therefore, insists that production and deliv- 
ery be not made at any cost, but at a cost which 
will allow a present profit justifiable for present 



COSTS 183 

conditions, and large enough in addition to make 
his investment for extra production and speedier 
delivery worth while, even though the future years 
do not bring a continuation of prosperous business 
conditions. 

The failure to consider these factors sufficiently, 
or at all, before making such investments may be 
the cause of losses in future and probably of not a 
few bankruptcies. 

When considering these problems : the question 
of better deliveries from existing facilities, when 
additional expenditures will not help, the effect on 
present costs of additional investments to secure 
better deliveries, and the effect of such expendi- 
tures on future costs under less prosperous condi- 
tions, the executive should find operating cost 
data and particularly that which have to do with 
production efficiencies and unit production costs 
of invaluable aid. He should find great use, 
especially, for data which show the effect of vary- 
ing unit productions on overhead and fixed charges. 

Inasmuch as delivery usually has as its chief 
factors time and certain total unit productions 
within that time, and as fixed charges and burden 
expenses must in most cases be distributed accord- 
ing to time and vary with it, the problem of ascer- 
taining the effect of the first upon the second is 
most important. 

With proper records collected and tabulated, 
this is not very difficult. 

Such records should be classified so that those 



184 COSTS 



items which are affected by the time element can 
be readily selected, so that all past performances of 
various producing units can be compared and the 
unit production of each for a given period be ascer- 
tained, and so that the effect of an increased over- 
head or fixed charge burden expense can be noted 
on a stationary production, or vice versa. The 
records should also cover and completely describe 
as many different conditions as have occurred, so 
that they may help in prophesying intelligently 
regarding hypothetical conditions which it may be 
desirable to assume. 

It is a very rare occurrence when a plant is taxed 
to its maximum capacity. Therefore the produc- 
tion manager seldom has any precedent to go by 
when, under prosperous conditions, he is asked to 
make statements regarding just how large a volume 
can be produced. 

It is possible that, although certain production 
can be secured, the unit cost will be thereby in- 
creased. It should be a part of such an estimate to 
show the effect of various increasing ^oductions 
on operating costs. ^^ 

When no data are available, usually the foremen, 
shipping clerk and other members of the ojj^aniza- 
tion are taken into confidence and an attempt is 
made to get down to facts regarding just how much 
this or that machine can do. Those officials may 
be very optimistic, may have been impressed at 
one time or another by an unusually good showing 



COSTS 185 



during a short period, and may base all their 
opinions on such impressions. The result would 
be, of course, that if business were taken on such a 
basis the plant would soon find itself overtaxed. 

On the other hand they may be very anxious to 
make their responsibilities as light as possible, and 
to relieve themselves of future burdens may base 
their statements on poor or at best on average 
periods, with the result that either new and un- 
necessary equipment and buildings are added, or 
valuable business is turned down with a pro- 
portionate loss of profit. 

Regardless of whether or not the operations have 
been standardized, regardless of whether or not the 
plant has reached its highest efficiency, regardless 
of whether or not a plant is taking care of all the 
business possible, sufficient data should be avail- 
able through operating cost accounting to make an 
intelligent estimate of maximum capacity with a 
fair degree of accuracy. 

For this purpose operating cost data should be 
collected which will point out the best productions 
of each and every productive unit, under various 
conditions, as well as the average and poorest 
productions. The effect of these productions on 
other factors and operations should also be pointed 
out. For instance, it should be clearly shown 
whether or not the shipping facilities took care of a 
maximum production satisfactorily and just as 
cheaply per unit, as of a lesser production. It 



186 COSTS 



should be shown whether or not receiving of mate- 
rials was hampered or more expensive when ship- 
ping was greatest. 

Information should be available as to how many 
operating units of one kind are necessary to keep 
pace with a certain number of units of another 
kind. For instance, the proportion of assembling 
time on a given product to the machine time on 
that product. 

This information must be secured covering all 
the various actual conditions. It is not satisfactory 
to use the best cases only, for this would serve 
little better than the statement of the optimistic 
foreman. Nor can it cover the minimum produc- 
tion period alone. Therefore, it is best to include 
such information in the continuous collection of 
operating cost data so that all possible conditions 
can be analyzed. 

It should be remembered that when a large 
demand is made on production, it hits in equal 
proportion each and every unit of production. 
Therefore, data should be collected covering not 
only the main operations and productive units, 
but each and every related one as well, because 
often under stress of very large productions, weak 
points show up where they are least expected. 

Data should also be classified and made quickly 
available, for as a rule time is an important element 
when a decision is required as to possible maximum 
capacities. 



COSTS 187 

With executives waiting, it should not be neces- 
sary to dig through great masses of unclassified, 
unfiled and untabulated data to secure this 
information. 



CHAPTER XXXVI 

USE OF COSTS FOR STANDARDIZATION 

IN DISCUSSING the value of operating cost 
data for use in standardizing operations, 
materials, equipment, designs, production and 
costs, we will separate our consideration into three 
distinct divisions, each one denoting a logical use 
and purpose of this information. In the following 
they are set forth in the sequence in which they can 
and should be properly applied. 

1. Use to indicate points where standardization 
is necessary, possible and profitable 

2. Use to measure currently results of partially 
completed work of standardization until 
standards have been attained 

3. Use to assist in maintaining the standard set 
after the work of standardization has been 
completed. 

We do not suggest that standardization, better- 
ment work, or the work of developing efficiency 
cannot be performed without the aid of operating 
cost data. It can and has been successfully done 

188 



COSTS 189 



many times. There are even cases where the 
collection of operating cost data was the result of 
standardization instead of the cause of it. 

It is an undeniable fact, however, that this work 
can be started much more intelligently, and can 
be completed with greater rapidity, where reliable, 
complete and accurate operating cost figures are 
available. 

Just as the experienced mariner, although he can 
often reach his goal by knowledge of the shore line 
or signs in the sky, finds that with the aid of a com- 
pass and proper charts he can steer a straighter, 
more direct and therefore quicker course, so the 
industrial expert, although he can often obtain 
results without operating cost data, finds them an 
invaluable aid in more quickly and satisfactorily 
reaching his goal — efficiency. 

When commencing the work of standardization 
of an industry, one is confronted with a mass of 
units represented by departments, operations, 
equipment, men, material and methods, each vary- 
ing, first, as to its relative importance in the 
whole, second, as to its effect on all or some of the 
other units, and third, as to its relative actual 
efficiency and possible efficiency. 

In order to make an intelligent start and obtain 
the greatest results in the shortest time, it is 
necessary to choose from among all these units, for 
first attention, those which hold the position of 
greatest importance in the whole, or in other words 
those which represent the greatest expenditure of 



190 COSTS 

money. It is further necessary te locate those 
which, although not so important in themselves, 
have a very decided effect on other units, many in 
number or of individual importance, and which in 
some cases may be actually retarding the progress 
of the entire organization. It is also very essen- 
tial, of course, to start work on those units which 
are in the worst condition, and which have the 
lowest efficiency. 

Nothing is more helpful, therefore, when we are 
ready to begin this work, than complete operating 
cost information, which should, if it is completely 
and reliably compiled, tell us which department is 
most important, costs the most money to operate, 
costs more than it should when compared with 
similar departments; which gives us similar in- 
formation regarding operations, as well as ma- 
chines ; which points out whether material or labor 
cost constitutes the greater proportion of produc- 
tion costs; which gives us a comparison of direct 
labor with burden labor, pointing out the propor- 
tion of one to the other in such a way that we can 
decide which requires attention first. 

We do not maintain that cost data alone are 
necessary. Costs must, no doubt, be supple- 
mented by further information secured from inves- 
tigations, as well as by experience and ability to 
analyze and interpret the information furnished, 
but they do provide a very satisfactory basis from 
which to work. 



COSTS 191 



We now come to the consideration of the second 
use under this heading — to measure currently 
results of partially completed work of standardiza- 
tion until standards have been attained. 

For this purpose cost data, properly compiled, 
currently collected, and correctly indicative, are 
very valuable, because they furnish a record of the 
effect of each change or move made to help in 
planning further work, and for future guidance. 
From such data it should be possible to note at 
once the effect of any change in mechanical equip- 
ment, any rearrangement of appliances, any 
changes in methods, whether manual or mechani- 
cal, as well as the effect of all changes in shop 
practices or systems, such as planning and dis- 
patching methods, order systems and material 
transfer plans. Data should also show the effect 
of different plans of wage payment, bonus or 
premium incentives, profit sharing schemes and 
the like. 

For all these purposes information should be 
promptly available for reference and should be 
carefully classified so as to point out separately 
the effect of each and every change mentioned 
above on every item of cost, as well as on the 
totals. The effect on totals is particularly neces- 
sary, inasmuch as a change may show a decided 
saving in the particular item of cost which it 
affects, but when the total is considered it may not 
prove an economy, because of its effect upon other 



192 COSTS 



items of cost. In the same manner the change may 
not seem very effective when considered from one 
particular cost standpoint only, but the effect on 
the total cost may make it wholly desirable. 

With a prompt knowledge of the results being 
obtained, it is possible to push most strenuously 
for completion that work which is bringing the 
greatest immediate returns and to introduce the 
same sort of changes in other directions where they 
will prove similarly effective. It is equally as 
important to be warned immediately of any false 
moves which have been made so that the effect does 
not become too far-reaching before the necessary 
readjustments are made. 

Experiments are inclined to be very costly and 
each step should be taken with a complete knowl- 
edge of the effect of the last. We should build our 
standards on a solid and substantial foundation of 
known and proven facts. In the majority of cases, 
changes require an investment of money and it 
should be shown just as soon as possible after the 
change has been made whether or not the invest- 
ment was profitable, if for no other reason than as 
a guide when making further investments of a 
similar nature. 

A current knowledge of the good results obtained 
from the work of standardization proves an 
inspiration to those engaged in this work. There 
is a great deal of satisfaction in seeing a plan 
developed at a cost of considerable study, effort 



COSTS 193 

and thought work out as was intended. It is part 
of the reward, and quite as important as the mone- 
tary compensation. It makes the work interesting 
and to a certain extent a game, with the cost state- 
ment as the score. 

A showing of good results also encourages the 
management to extend the activities of the work. 
Cost data are particularly valuable to the manag- 
ing executives of a business, inasmuch as, by 
pointing out the exact effect of each change, they 
help those who decide upon such changes to make 
more intelligent decisions on further changes either 
in the same or in other operations. 

A matter of great importance is the mainte- 
nance of a standard of production after it has been 
set. This is, in fact, absolutely essential in success- 
ful efficiency work. All the work of time and 
motion study and analysis necessary to arrive at 
a standard, all the education of workmen and all 
the mechanical improvements which are made in 
order to make it possible to attain that standard, 
lose their value almost entirely if they are not 
followed by that which brings the real result: the 
constant and continuous production of work on 
this standard basis. 

We have noticed that in most of the few cases 
of failure of attempted scientific management the 
cause could be traced to the fact that after the 
industrial engineer had standardized operations 
and methods and left the organization, the manage- 



194 COSTS 



merit either through lack of organization or in- 
spiration had not been able to maintain the 
standards which he had set. 

To maintain a standard it is, of course, of first 
importance to be properly organized, but next in 
importance, and, in fact, as a part of proper organi- 
zation, are correct operating cost data. 

Conditions in an industrial plant are constantly 
changing. These changes very often affect the 
standard production of work. Frequently, and this 
is the ideal condition, these changes permit of an 
increased standard. If they do not, the changes 
should not be allowed to occur. 

For this purpose cost information should be 
complete. It should be clearly classified for com- 
parison with the desired standard. It should be 
available promptly so that changes which have ill 
effects and practices which do not tend in the right 
direction can be stopped at once and before much 
damage has been done. It should be arranged in 
such a manner that the factors responsible for the 
incorrect practices and changes can easily and 
quickly be detected. 

One of the important values of standardization 
work is that it provides a goal for the worker. 
Properly collected operating cost data present this 
goal to the attention of all those interested from 
the worker up to the highest executive, together 
with a report or score of accomplishment. It 
becomes a constant inspiration and infuses an 
added interest into the work of production. 



COSTS 195 

The mere knowledge of what can be done helps 
us to do it. It is told of an inexperienced swimmer 
who entered a race in competition with experts, 
that he won the race merely because he was told 
how many strokes a minute it would take to do so. 
By counting the strokes he made in regular se- 
quence while racing he reached the goal ahead of 
his competitors. His operating data were an all- 
important factor because he could compare his 
accomplishment with the standard required and 
strive to maintain it. So in business, when we 
know what can be done and can constantly and 
continuously compare with it what we are doing 
through the medium of cost information, we will 
certainly be inspired to make the actual equal the 
possible. 

All these uses of cost data only show another 
reason why the management which would be 
efficient and successful must not only have cost 
data properly comparable with possible standards, 
but must permit such comparisons to gain the 
widest publicity among those in the organization 
who are responsible for results, so that they may 
become enthusiastic and inspired and interested in 
their work to an extent never before possible. 



CHAPTER XXXVII 

USE OF COSTS FOR FINANCIAL PURPOSES 

THE CHIEF features with which the financial 
interests of any business concern them- 
selves are: 

1. The provision of money for necessary expen- 
ditures for current activities 

2. A means of effective accounting for all 
amounts expended 

3. Safe investments for any surplusses. 

The first feature is, of course, one which is not 
very directly affected by costs except to the extent 
that cases have been known where credits desired 
have been denied or extended in proportion to the 
completeness of cost records, which in itself recog- 
nized costs as a true measure of good management. 
It is a fact that banks and financial interests are 
fast recognizing that in management more is 
needed to gauge the responsibility of an organiza- 
tion than a mere balance sheet. Costs statements 
giving more detailed and pertinent facts may often 
be found a real asset in establishing responsibility. 

As to the second feature, that of accounting, we 
believe it is obvious that the entire value of a cost 

196 



COSTS 197 



plan has been dissipated if it has not been arranged 
to become a part of the general accounting system. 
In other words an absolute essential of a cost plan 
is that it be designed to supply to the general 
accounts all information so classified and distrib- 
uted that it accurately ties up with these general 
accounts. 

Cost data which are not verified by this absolute 
check with the general accounts are worse than 
worthless since they are not only mere memoranda 
but also are often very misleading. The financial 
control of a business should therefore be able to 
turn to the cost plan for information, properly 
classified and distributed, pertaining to the operat- 
ing activities, which it requires for the general 
accounting, and should in turn be prepared to 
verify all such statements by checking with the 
general statements. 

Turning to the third responsibility, that of safe- 
guarding investments, we find that cost data if 
properly planned and used, afford real aid to the 
financial section of a business, when proposed 
investments concern either extensions of present 
activities or additions of new lines of endeavor. 

Much has been said in previous chapters regard- 
ing the application of the knowledge received from 
cost data in decisions regarding current invest- 
ments, and might be repeated when talking of 
decisions upon proposed general investments as 
well as of large extensions involving the investment 
of relatively large amounts of money in which the 



198 COSTS 

financial interests in a business naturally are 
especially interested. 

During the war this phase became one of great 
importance, when opportunities for large exten- 
sions came suddenly and often, but brought doubt- 
ful hope of long duration. Here good cost data 
were especially valuable and proved their impor- 
tance. 

It is worth considering in detail how this infor- 
mation can be used. 

Let us consider for a moment the effect of invest- 
ments on costs. Obviously the first result is in- 
creased fixed charges and depreciation to protect 
these investments. 

Before the initial investment in buildings and 
equipment can be used, other immediate invest- 
ments are required. For instance, equipment must 
be installed; miscellaneous benches, bins, trays 
and other factory furniture must be provided; and 
power and light must also be furnished. 

These additional expenses cannot be considered 
permanent assets and must be earned during a 
proportionately short period. There are necessary, 
of course, additional fixed charges to cover this 
equipment and these buildings, such as taxes and 
insurance. 

All these items should be taken into considera- 
tion in making intelligent decisions as to whether 
or not investments will prove profitable, and as to 
what adjustments in prices will be necessary to 
make them pay. It should be considered whether 



COSTS 199 

or not this equipment and these buildings can be 
used to the fullest extent during the entire depre- 
ciation period, and if not, in how many years they 
should pay for themselves. 

It is also necessary to consider what would be 
the effect on costs if demand for production 
dropped off, and the equipment and buildings were 
forced to remain idle. This, of course, would result 
in an increase in burden cost on the material which 
was produced to cover the additional depreciation 
and fixed charges as well as any part of the installa- 
tion cost remaining unearned. It is well to consider 
this possible condition before definitely deciding 
on investments. 

Also it should be remembered that in order to 
protect himself the manufacturer must, in some 
cases, receive prices for his product sufficiently 
large to cover the cost of installation, miscellaneous 
factory furniture, etc., which cannot be considered 
permanent assets. 

In all these considerations the manufacturer 
should find operating cost data, covering past 
performance in his plant, a great help. He should 
be able to tell from his equipment records the life 
of equipment similar to that which he contem- 
plates purchasing, and the percentage which should 
be charged off annually for depreciation. He 
should know what the insurance and other fixed 
charges have been, in order to compute what they 
will be on new equipment. He should be able to 
estimate from past records what installation, 



200 COSTS 

power, and light charges will be as well as the 
charges for repairs, maintenance and upkeep. 

Again, by referring to his records of production 
of similar equipment, he should be able to ascertain 
the effect of all these costs on the total cost and 
price of the unit of commodity produced, both in 
the immediate future when using the equipment 
to its fullest extent, and also at a later date when, 
under less prosperous business conditions, this 
equipment might remain partly or wholly idle. 



CHAPTER XXXVIII 

USE OF COSTS FOR PRICING AND SALES 

THE AMOUNT of use which is made of 
operating cost data for determining the price 
of work done depends to a certain extent 
upon, the nature of the business. Where the mar- 
ket price has been standardized, where the article 
manufactured has been standardized as regards 
specifications with a recognized value and price, or 
where the product is of unequalled quality or kind 
and is so desirable that an unusual margin of profit 
can be secured, it will usually be found that little 
use, if any, is made of cost data in fixing the price 
of the product or material when sold. 

Although many manufacturers producing arti- 
cles which do not come within the classifications 
mentioned have come to recognize the fact that the 
only conservative method of putting a price on 
material sold is upon the sound basis of the cost of 
production, there are still great numbers who do 
not as yet fully realize that this is one of the impor- 
tant advantages to be secured from the collection 
of operating cost data. 

Many may still be found who, in order to price 

201 



202 COSTS 

an article, add the gross cost of material used to 
an estimated cost of labor applied, and to this, 
beside the profit desired an arbitrary figure to cover 
all other expenses. This figure perhaps had for 
its only justification the fact that a competitor 
had been known to use it, or that it was once found 
to be correct and is therefore assumed to be right 
under all circumstances. Unfortunately, too, this 
figure, especially where there is much competition, 
is very much less than it should be, and rarely will 
it be found to more than cover the actual cost. 

Two very important facts are not recognized 
when prices are fixed in this manner. The first is 
that no two factories have conditions exactly simi- 
lar or expenses exactly alike; the second, that con- 
ditions are always changing in the same factory. 

There are so many different factors which enter 
into the cost, such as location with reference to 
source of supply, kind and age of machinery and 
equipment used, power used, ability of concern to 
obtain and keep efficient workmen, maximum pro- 
ducing capacity, and many others, that it is dif- 
ficult to imagine two producing plants even under 
the same management where all these factors 
would be identical and where consequently the 
costs would be exactly the same. 

In one plant electric current may cost five times 
as much for the production of the same number of 
units as it does in another where equipment is 
more modern and requires less driving power. A 



COSTS 203 

foreman at fifty dollars a week may supervise the 
manufacture of twenty-five units as a maximum 
production in one plant, or an average cost of two 
dollars per unit, while next door the same priced 
man may be supervising the manufacture of fifty 
units at an average rate of one dollar per unit. 
It is, therefore, safe to say that in all cases the 
other man's figures and prices are uncertain and 
unsafe, and that prices based on costs collected in 
your own plant covering your own conditions are 
the only kind which will withstand the test of time. 

Few manufacturers realize how rapidly and often 
conditions change in their factories. A slight 
change in method, machine or men may have a 
far-reaching effect on the cost of production. A lot 
of raw material difficult to process may be account- 
able for a cost this week which is double that which 
was found to be correct last week. Salaries and 
wages are constantly changing, usually increasing, 
and corresponding changes must occur in costs, 
unless production varies in exactly the same pro- 
portion, which is rarely the case. 

Even if all expenses and total costs remained the 
same, which they rarely do, production must vary 
in almost all cases from time to time. It is difficult 
to realize how far-reaching and quick is the effect 
on the unit cost of a changed production with a 
stationary expense. A burden cost of one hundred 
dollars on a production of twenty-five units would 
average four dollars per unit; should this produc- 



204 COSTS 



tion drop but twenty per cent, which is not at all 
an unusual circumstance, the unit cost would 
increase to five dollars — an increase of twenty-five 
per cent. 

It will usually be found that while direct ex- 
penses, such as direct labor and materials, can be 
regulated with production, burden cannot be 
varied nearly so consistently. In most cases it 
will be noticed that burden expenses reduce at a 
slower rate than production. This is probably due 
to the fact that such reductions are not made 
immediately, but are put off until it is absolutely 
necessary because it is hoped until the last that 
production will soon be up to normal. 

Because of the many changes which occur in the 
average plant and so rapidly and vitally affect 
costs, prices should not be based entirely upon 
costs once secured from actual conditions, but from 
costs collected currently or at least as often as 
changes which would in any way affect them occur. 

We fully appreciate that it would be impractical 
to attempt to change prices each and every time a 
change in cost occurs, and we do not recommend 
such a procedure, but we believe that comparisons 
should be made so that any important increases in 
cost can be rectified and reduced, or if this is 
impossible, at least seen in their true relation to 
decreased future profits or an increased selling 
price. If the changes in costs are reductions and 
are consistent, it may often be found advisable to 
reduce the price accordingly, and thereby develop 



COSTS 205 



strength in competition and secure a larger volume 
of business. We believe that in many cases manu- 
facturers owe it to their customers and to the 
public, to know of reductions in cost and give the 
buyers a share in the benefits of such reductions 
just as soon as they can consistently do so. 

Two things which are essentials in cost data used 
in fixing prices are: 

1. That the cost be complete and include all 
items 

2. That this cost be available as soon after the 
work is completed as it is possible to collect it. 

When we find quotations on a given piece of 
work varying from a certain price to several times 
that price, when we note that in many cases among 
many bids received on work no two even approach 
similarity, and when we find competitors cutting 
each other's and their own prices even as much as 
fifty per cent of the original and lowest quotations, 
we must conclude that one of three things is 
accountable. 

Either the low bidders are working under very 
modern and standardized conditions, while the 
higher ones are still operating with obsolete equip- 
ment and methods; or they do not have any 
accurate knowledge as to operating costs, or do 
not use what data they have in estimating prices of 
work to be done; or, last and worst of all, some of 
the bidders are maliciously cutting prices even 
below costs, with a knowledge of actual costs, in 



206 COSTS 



order to keep the business away from certain com- 
petitors with the hope that this may ultimately 
drive them out of the field. 

The first condition is one which is being steadily 
corrected, but it is a long process to standardize all 
organizations in even one industry, and while it is 
to be heartily encouraged and has for one of its 
most essential features accurate cost data, we must 
turn for a more immediate remedy of this indus- 
trial evil to the correction of the second, and with- 
out doubt most frequent cause, the ignorance of 
correct cost data or the neglect to use it in estimat- 
ing work. It may be well to mention here that the 
collection of correct operating cost data, particu- 
larly when used for estimating work where it is 
possible to compare with competitors' prices, will 
point out inefficiencies and will often bring about 
the standardization of operations, the purchase of 
modern machinery and the development of higher 
efficiency in an industry. 

In-order that cost data may be used intelligently 
for estimating on prospective work they must be 
available. Quotations and bids must be made 
promptly. There is no time, as a rule, to search 
through a great mass of information for a specific 
figure. It must be easily accessible. 

This information should be collected according 
to orders, contracts or lots completed, and be suf- 
ficiently described to make possible ready recogni- 
tion of just what kind of work it covers. If this 
complete description is impossible or not advisable, 



COSTS 207 



reference to other sources should be provided so 
that it can be secured easily. 

As often as possible these cost records should be 
classified under each order, contract or lot as to 
operations, machines or men, as well as various 
classes of costs. This is useful where it is found 
that no previous case exactly covers the prospec- 
tive job, inasmuch as it may be possible to choose 
from the records of several previous orders, part 
from each one, information adequate to make a 
close estimate on the cost of the new class of work 
to be done. 

It is also well to record the efficiency at which 
the operation or operations on an order were per- 
formed, wherever it is measurable. It may be of 
assistance in quoting on work if past or present 
efficiency can be compared with possible future 
efficiency. 

Above all, data must be complete, for partially 
complete data are worse than no data at all. 

Where information has been collected on a large 
enough number of orders, contracts and lots and 
been properly classified as to operations, men, 
machines and various kinds of costs, charts, 
graphs, data sheets and price sheets can be devel- 
oped to put the information in shape for ready, 
immediate and rapid reference. This is most 
advisable just as soon as it is possible. 



CHAPTER XXXIX 

THE EFFECT OF COST DATA ON THE LABOR PROBLEM 

COSTS HAVE for too long a time been con- 
sidered, and as a matter of fact have been 
used, merely as historical records or as life- 
less accounting systems. It is urgent that they be 
recognized and used to their fullest extent as an 
influence in managerial decision, as a basis for 
intelligent control of all factors pertaining to pro- 
duction. And as an outstanding factor in produc- 
tion we come naturally to labor, the workers in the 
plant, and to a consideration of the influence of 
cost data upon this important group which repre- 
sents a problem of ever-increasing importance, and 
one which strange to say, with all our studies, 
researches, analyses and discussions we are barely 
beginning to understand. 

The use or lack of good cost data influences the 
labor problem very definitely both directly and 
indirectly. 

Every manager, superintendent and foreman 
over large or small groups is called upon daily to 
make decisions regarding the workers. He must 
decide which men and how many men to employ, 

208 



COSTS 209 

which to promote, how to assign them to work, 
what their various wage rates, increases, and rela- 
tive value as they progress in the ranks must be. 
They must decide as to the effect of wage rates 
upon production costs, and burden percentages. 

During prosperous conditions decisions must be 
made as to the employment of larger forces, work- 
ing extra hours, shifting of working forces and 
redistribution of men to larger opportunities. 
During less prosperous conditions decisions must 
be carefully made as to reduction and redistribu- 
tion of forces, change in working hours, reassign- 
ment of workers and change of wage rates. 

Each and every one of these decisions has a real 
bearing upon the development of proper relation- 
ships with the workers in an organization. The 
reactions of the workers toward management and 
employers are molded, sometimes gradually, by a 
succession of such decisions, or in one fell swoop 
by a single outstanding exhibition of judgment of 
this class. These are the direct influences upon the 
labor problem. 

With the best information available these deci- 
sions are none too easily made, and without reliable 
detailed data for guidance they come hopelessly 
near being a guess in the dark, sometimes fair, 
often very unfair, to the workers in the plant. 

With all our great industrial progress in this 
country there still remains an overwhelmingly 
large group of managers who continue to follow the 
line of least resistance, refuse to secure reliable data 



210 COSTS 



as a basis for judgment, or fail to recognize the 
value of analysis of the facts these data portray in 
making decisions. These managers wonder why 
labor is not satisfied when developments indicate 
mistaken judgment or even unfair treatment on 
the part of the management. 

More hopeless is the type of management which 
accepts all these problems as entirely controlled by 
chance or outside influences, and does not take 
personal responsibility for their solution. In mak- 
ing their decisions such managements are largely 
guided simply by what others do, and usually do 
only what they must to fulfill the urgent demands 
of labor, with little real knowledge of the effect of 
their action. 

We cannot emphasize too strongly that every 
decision having a direct influence on the relation- 
ships of labor should be made with a knowledge 
secured from an analysis of reliable cost data, 
prophetic as well as historical, pertaining to each 
and every related item of cost which will be 
affected by such decisions. Then, if decisions of 
any sort are forced or become politic, or because of 
some uncontrollable influence seem necessary even 
in opposition to better judgment, they are made 
with eyes wide open, and with a sane foresight of 
future moves. Even if occasionally such a decision 
does not turn out to be the most effectual, there 
should be satisfaction in the thought that every- 
thing possible had been done to fulfill a respon- 
sibility. 



COSTS 211 

Our comprehension of a proper cost plan is one 
which includes a record of all labor cost data so 
classified as to offer a continuous fund of informa- 
tion as to individual workers, groups of workers, 
departments, direct labor, and burden labor, which 
traces such costs back to their origination, and 
fixes responsibility for it and compares and pro- 
portions each cost to the results secured from it to 
show as far as possible the positive value of every 
item of the labor factor to the production program 
as a whole. 

With such information available and used the 
manager no longer works in the dark. He ordinar- 
ily need not guess, and knowledge minimizes the 
proportion of arbitrary decisions and the chances 
for unfairness. 

It is logical that a manager of men can pass 
better judgment on problems pertaining to them if 
he has comparative data available. For instance, 
the individual value of a single worker, which must 
in the end be decided on a basis of individual 
effort regardless of propaganda to the contrary in 
favor of rates of wages by classes, can certainly be 
more satisfactorily adjusted by an analysis of 
records showing comparisons of the worker's pro- 
ductivity at various stages, as indicated by opera- 
tion and unit costs of the particular worker's 
productivity with that of others in the same class, 
and of costs of his operations with those of other 
operations. Better judgment can certainly be 
applied to the much-needed solution of the problem 



212 COSTS 

of adjusting base wage rates for various classes of 
labor in a given industry. This alone has a dis- 
tinct effect on labor relationships as was pointed 
out emphatically in the wage adjustments of 
the ship yard workers; if well-classified costs are 
available showing relative importance of each class 
of labor to the total unit costs, the margin available 
for such adjustments can be fairly determined. 

It requires very little imagination to find dozens 
of other problems involving relationships with the 
workers wherein the solutions require a knowledge 
securable only from well-classified comparative 
labor costs. Space will not permit a complete 
analysis of the extent of these problems, but it is 
hoped merely to suggest enough of them to inspire 
the application of cost knowledge to the solution 
of these or similar problems as they may arise. 

Aside from the decisions which directly influence 
the present welfare and future development of the 
workers, let us consider the indirect influence 
brought to bear by decisions which concern other 
factors in production and have an indirect effect 
upon the workers. 

Every worker, other things being equal, prefers 
to work for a prosperous concern. Take for in- 
stance the question of selling prices where the costs 
can properly affect these prices : if they are blindly 
established without true costs as a basis and the 
prices are set so high as to result in a loss of volume 
or so low as to operate at a very low margin or 
even a loss, has not the result affected the labor 



COSTS 213 



problem again? The worker is not certain of his 
job, he has no assurance of a future, his promotion 
is forced. 

Take, for instance, working conditions, which we 
know without doubt are a real influence upon the 
worker's reactions. How are they influenced by 
the use or lack of proper cost data? Briefly in this 
wise: the manager of a rapidly growing plant can 
most effectively plan his extensions with good data 
as a basis for judgment. He can avoid the Topsy 
type of plant that "just growed." He can establish 
reserves for plant improvements, extensions and 
maintenance, analyzing just how much his business 
at various stages will stand for such expenditures, 
and can often make adjustments so that little less 
than the best will be provided for the workers' 
comforts and full productivity. 

Through proper depreciation of equipment and 
proper control he can provide equipment for his 
workers which will make them satisfied operators 
with a real pride in their operation. 

Through the use, for control purposes, of cost 
records pertaining to materials both direct and 
indirect he can educate his workers to a realization 
of values which will create a new interest in their 
work, and give them that sense of responsibility 
which has never failed to develop better men. 

Through his use of the cost data for control and 
reduction of burden, he can establish a service, 
supervision, training and maintenance for his 
workers never before possible. He will in many 



214 COSTS 

cases be able to apply savings to greater and more 
effective service to the workers. 

Here again we have only indicated the high spots 
of cost usage. A detailed analysis will show the 
manager no end of further opportunities. 

It is not surprising to find how many times a 
satisfactory labor relationship goes hand in hand 
with well-developed cost and production records, 
and vice versa, how often, in fact how almost 
always, the grumbling and dissatisfied groups will 
be found in the plants where little control of costs 
or production is available or used. 

There are, of course, many other features which 
affect labor, and many more things to learn about 
workers than about labor costs, but we venture to 
say that a real step toward a better understanding 
will have been taken when labor is managed with 
more definite knowledge of costs and relative pro- 
ductivity as a basis for decisions and judgment. 



CHAPTER XL 

GETTING THE CO-OPERATIVE SPIRIT THROUGH COSTS 

ALWAYS and ever the spirit of any group of 
men is merely a reflection of that of their 
leader. Find the manager of men who is 
alert, progressive, a student, a careful judge, a keen 
analyst and a sound economist and you will find 
under him a group of interested, co-operative 
workers. 

To those who complain of the difficulty of getting 
labor to co-operate we have but one suggestion: 
teach them how to co-operate. Educate them as 
to what is required of them, tell them their part 
in the whole program, outline to j them their 
responsibility — appeal to their pride, and you can- 
not help but stimulate their interest. It is but 
human to respond to such appeals and respon- 
sibilities. 

But unfortunately those who should educate 
their workers along these lines are often not them- 
selves educated. In many cases they do not know 
what to ask of workers, what to expect of them. 

Education is needed, and not only and not 
primarily of workers, but first of the great army of 

215 



216 COSTS 



executives, managers and foremen who handle 
labor. They must be educated, first to the value 
of data as a basis for decision, next to the type of 
date required, and finally to the use of them. 

We hear much of Americanization of foreigners 
in the ranks of workers. Surely this is a worthy 
move and should be well supported, but what an 
immense task is ahead of us in the education of 
both American and English speaking workers to be 
good co-operative partners in manufacturing enter- 
prises, and first of all, in the education of the 
managers of men as to what to require and how to 
attain it. 

And in all this educational work, costs of the 
proper sort, correctly applied and published, are 
the real factors. There is no other measure of 
results which is so influential as tell-tale figures in 
dollars and cents. Nothing will teach management 
how to manage so effectually as this measure of 
management itself. Nothing will teach the work- 
ers how to co-operate so effectually as information 
which shows the effect of such co-operation or the 
lack of it. Why do men rise in organizations faster 
and faster as they go up into higher responsibili- 
ties? Because as they rise they become more and 
more intimate with the relationship and value of 
their efforts to the whole; in other words, learn to 
co-operate. They attain a sense of proportion and 
of the fitness of things. These are the lessons which 
every worker must be taught. Costs are a firm 
basis for this education. 



COSTS 217 



The management, each and every day influences 
the spirit of every worker high or low in the organi- 
zation, by its knowledge of costs and its applica- 
tion of this knowledge. 

Let us consider, for instance, normal conditions. 
If the management itself has not taken proper 
steps to know more than the wages paid a worker, 
and has little or no data regarding the propor- 
tionate productive return for such money, is it not 
natural that the workers should also think only in 
terms of wages? If the worker has not been offered 
any standards or objectives will he not be justified 
in establishing his own? 

If employers continue insistently to accept labor 
merely as a commodity, to be purchased in terms 
of hours alone, can it be expected that labor will 
offer itself in any other terms or strive to give any- 
thing more than hours in return for wages? 

In co-operation there must be a known, tangible, 
common objective; if little is known about relative 
performances, or the influence of costs, little or 
nothing can be done to establish such a common 
objective for both employer and employee. 

Just so long as managers know little about true 
costs and fail to tell labor the little they do know, 
just so long will there be difficulty in securing the 
co-operative spirit. There must be established a 
more satisfactory common ground between capital 
and labor. They must learn to speak a common 
language of values, interpreted in terms of costs 
of productive effort and relation between perform- 



218 COSTS 



ance and reward. Employers must learn this 
language themselves, through proper costs, and 
then must take steps to teach it to their employees. 
A large task, to be sure, but the only solid founda- 
tion for the establishment of proper relationships; 
a, worthy objective indeed for several generations 
of work. 

If under prosperous conditions and pressure for 
production the manager without the aid of cost 
information as a guide carelessly spends money 
depending upon it alone for results, can it be ex- 
pected that the workers will have any great appre- 
ciation for the dollar? And since the dollar he 
directly affects is the wages he receives, it is but 
natural that he thinks only in terms of getting 
"his," and not in terms of the time he spends which 
represents to the employer the dollar he controls. 

If the management has no control of materials, 
no definite policy based on cold facts regarding 
their use; if in other words there is no outstanding 
indication of proportionate values of the materials 
handled by the worker, shall it be expected that he 
will of his own accord go out of his way to conserve 
them? They do not even represent values to him, 
until definitely expressed as such to him. 

Teach the worker values, economic relationship, 
productive ratios, all as portrayed by proper cost 
data and you will soon teach him how to co- 
operate. 

Then when the dull period comes and retrench- 
ments must follow, if the executive tells little or 



COSTS 219 



nothing definite as to the effect upon labor, either 
because he has little to base his judgment upon or 
fails to apply what little he has in the broadest 
sense, and keeps everyone in the dark until the 
moment when he arbitrarily makes the cuts which 
affect the worker, can he expect any spirit of co- 
operative retrenchment? Not knowing condi- 
tions, having no appreciation of effect, no knowl- 
edge of relative values, the worker can only hang 
on as long as possible, making each job last, wait- 
ing the impending blow with resentment against 
the man or group of men — the employers whom he 
cannot help but blame for his misfortune. 

If, on the other hand, with prophetic cost figures 
as a basis and a guide, the employer establishes a 
definite program of retrenchment, takes every 
member of his organization into his confidence, 
lays all facts before them and shows them his con- 
clusions, it is logical enough that from self-pres- 
ervation alone the workers will strive to co- 
operate to protect their own interests. If in the 
end they sustain individual losses they do so more 
willingly with a knowledge that all had been done 
to prevent them that could be done, and that they 
themselves had a hand in it and were at least 
partly responsible. 

There is need of a wide campaign of education 
in practical economics in this country, economics 
taught very differently than in the past. Econom- 
ics must be recognized as the acts of men as 
individuals and groups, which affect the production 



220 COSTS 

and distribution of the wealth of the country. Too 
long has this been recognized as solely controlled 
by financial laws and regulations through the 
manipulations of large investors and capitalists. 
It is true, of course, that these have a very large 
influence, but the last several years have proved 
beyond all doubt that the individual workers by 
their effect on production, its use and distribution 
exert a definite influence upon all phases of eco- 
nomics. 

In his daily production, purchase and consump- 
tion every person, through the policies, judgment 
and intelligence applied in such acts, establishes 
economic conditions. In other words it is not the 
number of dollars which controls our economic 
conditions, but the value of these dollars, the 
amount of product they represent and the way this 
product is produced and used. This involves every 
man. 

Costs properly developed become a picture of 
the effect, proportionate relationships, and prob- 
able future influence of all these acts of individuals 
and groups. The establishment of proper costs 
and the education of all concerned in their proper 
use will do much to develop the much needed 
understanding of practical economics in this 
country. 

We do not advocate an attempt to teach every 
worker all the intricacies and complications of cost 
accounting — it is difficult enough to accomplish 
this education with the executives who must know 



COSTS 221 



them — but we do believe that every worker should 
be taught to understand the relative costs of all 
features which he definitely affects by his own 
individual acts. This is the minimum of cost edu- 
cation necessary to secure the co-operative spirit. 
It is but a start toward the development of a 
sound economic condition in industry and the 
country as a whole. 



CHAPTER XLI 

FORMS 

IT PROBABLY seems strange to many readers 
that the subject of forms has been left for 
consideration until near the end in a dis- 
cussion of costs, that reproductions of forms are not 
included in this volume, and that the pages are 
not more or less profusely illustrated with descrip- 
tions of forms in use or proposed. This omission 
has been intentional. While forms are a distinct 
necessity as tools and mechanisms in the develop- 
ment of proper cost records, detailed and specific 
forms should never be allowed to confuse the issue 
of the correct principles and philosophy under- 
lying the cost plan itself. 

In the past we believe the study of cost methods 
has been centered too often around specific sets 
of cost forms of various sorts. Too often the tail 
has been allowed to wag the dog, and the forms, 
being tangible, have been described at length 
while losing sight of the principles which they 
served to apply. Many of our volumes on costs 
have been series of descriptions of the use of forms 
intended to be suggestive for similar application. 

222 



COSTS 223 



Even at this late writing there is in existence at 
least one organization which attempts to sell a set 
of forms pretended to be a complete factory cost 
system. 

If there has been any one thing which more than 
all others has retarded the progress of true costing, 
it is this too concentrated study and application 
of forms. 

In many cases forms in use by one company 
have been secured by another which attempted to 
install them in its own business with very little 
modification. Very little comparison of the con- 
ditions and circumstances under which they were 
used was indulged in. Little or no consideration 
was given to the principles which the particular 
forms aimed to apply, and less, to whether or not 
the same principles could or should be applied in 
the case in hand. In fact it was considered a feat 
to have secured the entire forms of a company 
whose cost methods were considered good. Forms 
were guarded carefully, to keep them from falling 
into the hands of competitors, so important were 
they considered. 

Unfortunately in so many instances where sets 
of forms were transposed in toto in an attempt to 
install a cost system, the failure of the misapplied 
forms was charged up as a failure of the principle 
of good costing, and condemned all cost keeping as 
impractical, or even impossible. 

It is encouraging to see a gradual change in this 
state of affairs and to find a greater interest in laws 



224 COSTS 



and principles. We find trade organizations openly- 
comparing and exchanging forms. And why should 
they not, as they would use a common piece of 
equipment, a tool which was standard for the 
trade? 

All this does not mean that forms do not deserve 
attention, or that they have suffered from this 
apparent lack of interest. On the contrary this 
more open comparison and exchange, the recogni- 
tion of forms as a tool, has had a tendency to 
standardize them and hence to bring about their 
real improvement. 

Forms as tools and mechanisms in their proper 
relationship to costs are deserving of much study. 
As a matter of fact in all probability a volume 
larger than this could be written on the subject of 
forms alone and it would be a worthy task. 

Even with sound principles and philosophy in 
mind, forms may easily spoil the entire application 
of cost keeping. They may cause that condition, 
so dreaded in methods and systems, commonly 
known as "red tape." They are therefore the 
important step between the cost principle itself 
and its ultimate application. 

After the entire cost plan has been decided upon 
and outlined and the time has come to choose 
mechanisms and design forms, it is advisable to 
consider several important features as follows : 

1. The information desired, classified as to its 
source 



COSTS 225 

2. The route over which this information must 
travel while used and until finally filed away 

3. The individuals who must be depended upon 
for the information 

4. The individuals who will use it 

5. The relative importance of the various items 
as regards use, promptness required, accuracy 
needed, and descriptive detail wanted 

6. The relative importance in the final result of 
each item of information needed. 

With all these features well in mind, the forms 
themselves can easily be designed. Sample forms 
may be used for guidance at this stage but should 
not be allowed to exert too great an influence. 

The forms should be designed so that they 
provide for recording all the required information 
but no more. Many extra spaces, miscellaneous 
columns and lines without specific purpose are 
only confusing and cause extra effort not only in 
filling out the forms but in using, tabulating and 
filing the records. 

Forms should be designed so that only the mini- 
mum amount of effort is expended in their use. 
This is effected in the first place by carefully 
arranging each form so that as far as possible it 
will bring forward all information needed regarding 
any element at one time. Arranging the route the 
form travels for the collection of data in proper 
sequence, eliminating the retracing of steps as far 
as possible will effect this. The arrangement of 



COSTS 



forms so that a number of copies of the same form 
can be filled out at the same time, in some cases 
two or more forms at one time, will influence their 
practicability and the amount of effort required. 

But here it is well to sound a warning. It is easy 
to go to extremes in devising ingenious systems. 
After all, simplicity is a real virtue and it pays well. 
It is always absolutely necessary to keep in mind 
the intelligence of the individuals who are to be 
required to fill out, handle and use these forms. 
Not only their intelligence but their time must 
be considered; the more intelligent the worker the 
more valuable his time. Therefore the form must 
be designed so that it can be easily filled out by the 
clerks available, and is not so complex that it 
requires an intelligence to handle it out of all 
proportion to the available personnel and to the 
results of its use. 

Then, too, the forms will greatly influence the 
use of the data. Many beautifully printed forms 
have been known to fail ignominiously in their 
mission because they involved too much study 
and were altogether too complex for effective use. 
The relation of this to the existing and available 
personnel must also be well considered. 

The size of forms is a matter of considerable 
importance. First the size influences economy 
in the forms themselves. They must waste no space 
and yet they must not be so small that they are in- 
convenient to fill in or use. They should be of a size 
that will cut economically from standard paper sizes. 



COSTS 227 



The size and shape are very important as they 
relate to binding and filing. It should be arranged 
to bind forms in economical and accessible standard 
filing equipment to facilitate their use. Large, 
clumsy binders are a hindrance to good record 
keeping and should be avoided. 

Colors of papers and of inks used in printing and 
ruling are important. They facilitate sorting, 
and the use of some copies separate from others. 
Certain colors of papers and inks and combina- 
tions of the two facilitate reading and are therefore 
especially desirable. 

The arrangement and rulings of the forms are 
items of great importance. Here consideration 
should be given to arranging spaces for important 
items in their proper positions for quick reference 
and use, to proper positioning of various spaces in 
proper relationship to others, in order to facilitate 
addition, subtraction or multiplication of items, to 
proper positioning of index, reference or file data 
for speedy use and the arrangement of items in 
logical sequence in order for quick use and record- 
ing. The arrangement must also allow as little 
doubt as possible as to what is required and how 
it is to be recorded and used. 

The quality and texture of paper is also 
important. Heavy paper should be provided for 
plant use and for forms used often and much, thin 
papers for duplicating forms to insure good legible 
copies and good quality paper on important forms 
to be preserved for long periods. 



228 COSTS 

Printing and type faces are worthy of thorough 
consideration. Good, practical, easily read print- 
ing is an asset on all forms, facilitating and often 
inviting their use. It is desirable if possible to 
standardize on the type. 

It is well to try out forms by using a few dupli- 
cated copies before the printing is ordered. Then, 
as soon as all experimenting is finished, should 
come standardization of the forms and methods, 
to permit of ordering printing in large quantities. 

In the development of forms there is a tendency 
to provide more numerous and more difficult 
kinds than necessary and often too many dupli- 
cates of a given form. Study will often point this 
out. We are reminded of one case where four 
copies were reduced to three, then later to two, 
although the form with four copies had been used 
in hundreds of thousands for years. Another 
study showed that one form could do more than 
the work of three. In another case twenty-one 
forms were reduced to eleven for the same work. 
In another case a costly printing job was eliminated 
because it was found that forms that were seldom 
used could be more economically ruled by hand. 
In one organization where upwards of four hun- 
dred forms were used study and standardization 
eliminated over thirty per cent. 

A rigid policy in regard to changes of design of 
forms should be established. This is almost as 
important in a cost system as changes in design of 
a machine in a machine shop. Many good cost 



COSTS 



systems have become entirely demoralized through 
arbitrary and careless change of forms. Before a 
form once standardized and accepted is changed, 
approval should be required from a chief co- 
ordinating executive, the higher the better, who 
should approve only after conferring with all 
individuals involved in the filling out and use of the 
forms. A change which may facilitate matters in 
one department or for one individual may easily 
handicap any number of other departments or 
individuals. Changes should be discouraged and 
allowed but infrequently. Changes often affect 
the entire cost routine and may in the end result 
in an entire change in the final results secured. 

It is advisable to review all forms periodically to 
make sure that they are being used to fullest 
advantage, to eliminate dead timber, to ascertain 
why certain ones are not being used, and to pro- 
vide for any improvements possible. This may 
be done twice a year. 

Remember that although forms have no direct 
bearing on the particular principles and philosophy 
applied in costing, they are important in their 
application 



CHAPTER XLII 



COST TESTS 



EVERY cost system should be able to fulfill 
certain tests to prove its worth. Outstand- 
ing in these tests, in fact so important as to 
be almost alone in its class, is the one test — use. 
Are the records really used to their fullest advan- 
tage? Does every item mean something to some 
one in the organization? Are all the statements in 
reality mechanisms, or mediums of control in the 
hands of the proper individuals? 

There is no excuse for the existence of a single 
item of information, for the collection and tabula- 
tion of a single figure, for the detailed description 
of even one item of expense, if the result is not used. 

Our main test then is use. It would be prefer- 
able by all means to have a dozen main items of 
cost data constantly referred to, in statements 
thumb-marked and torn, than to have volumes of 
detailed data, beautifully printed, bound and 
indexed never referred to for use, but opened only 
to exhibit the style and beauty of the records 
themselves. 

It should be noted that the test imposed is use 

230 



COSTS 231 

and not usefulness. Many useful costs are not 
used, while of course many costs would be used if 
they were useful or usable. This brings into 
consideration two factors which must be consid- 
ered. First, the methods, systems and data and 
second the personnel for whom they are developed. 
It is not only important to have cost data which 
could be used, but it is also important that the 
data be such by its nature and arrangement that it 
will be used by the particular individuals who 
should use it. 

This brings us to an important consideration 
which is often overlooked. Some executives abhor 
detailed data, they resent the necessity of long 
analytical statements, they have no patience or 
time for long tabulations or comparative figures. 
They are interested in and will use striking and 
emphatic comparisons and important items out- 
standing in glaring colors. For them data should 
be carefully arranged so that it will [demand their 
attention. Here, particularly, graphic presenta- 
tion should be applied. It particularly appeals to 
this type of executive. He will use data emphat- 
ically visualized, will pay attention to informa- 
tion which can be quickly and easily assimilated 
at a glance. 

| Probably this type of executive is the more 
modern and at present the prevailing type, and 
this no doubt accounts for the popularity of 
graphical presentation of costs. But there still 
remains the executive who prefers to use detailed, 



232 COSTS 

long-drawn-out, tabulated statements of costs. 
He prefers to study the individual items, to follow 
them then into their respective totals and gradually 
but surely to grasp the picture. He is glad to 
devote this time to the study and finds satisfaction 
in his complete familiarity with every detailed 
item. While this is not always to be encouraged 
as most effective management, it is by all means 
desirable to furnish him the data in the form he 
prefers, rather than to discourage use of data at all 
through a presentation which does not properly 
feed his detailed mind. 

Here we have another excellent reason which 
would alone be sufficient were there no other, for 
designing each cost method particularly for the 
given case; always using a made-to-order system 
and never the ready-made plans which sometimes 
are considered. The plan should be outlined 
particularly for each case so that it will not only 
be useful but used. 

There are other tests, all of which influence the 
use to a marked degree. Let us consider some of 
them. All data must be accurate if they are to be 
used. A single error will cause an executive to lose 
confidence in the cost statement; he will discount 
it and soon be discouraged from using it. All 
items should be verified so that results can be 
proved, and be properly supported by authentic 
records. 

The presentation should be practical if it is to 
be used by the busy executive. He has very little 



COSTS 233 

time or interest as a rule in experimental, theoreti- 
cal analysis. He will use straight-forward com- 
mon-sense data, called by their right names. He 
wants no fancy nomenclature, no theoretical 
"isms." He does not care to guess at the meaning 
of any of them. Practical simplicity will hold his 
attention. 

Probably nothing is more important than truth- 
fulness. Distorted figures soon lose the executive's 
interest. Fine showings which careful analysis 
easily discounts, or at least questions, are never 
worth while. The truth should be the very back- 
bone of the cost statement; its daily use is more 
sure if it is reliable and authentic. 

The need of truth is one of the reasons for 
another desirable feature — completeness. The 
truth can often be hidden by leaving out certain 
items. The presentation should be complete or it 
is soon doubted. Even true facts can often be 
questioned for want of complete supporting details. 
If the executive who is being interested in the cost 
statements looks for certain data to make his 
study complete and does not find them, he quickly 
becomes discouraged. 

Then too to encourage actual use, the records 
must alway be intelligent. Executives should not 
be required to ferret out ambiguous meanings. 
They have no time to puzzle out meanings of 
descriptions but want them intelligently ex- 
pressed in understandable terms. 

The next qualification has often been suggested 



234 COSTS 



and is well established. It is promptness in pres- 
entation of cost data in order to facilitate use. 
We are all much more interested in current than 
in ancient history. The executive thinks in terms 
of today. He would a great deal rather look for- 
ward than backward. He reads today's news- 
paper but seldom reads one several weeks old. 
Other arguments for immediate records to facili- 
tate effective use have been repeatedly given. 

Another feature which has an influence on the 
use of cost data is the extent to which it is clearly 
defined. Just as an organization plan should draw 
definite lines of authority and responsibility, so 
the cost chart should be clearly defined so that 
each executive may understand without a single 
doubt just how far he is held responsible and there- 
fore to which features he must apply his especial 
attention. Someone accountable for every item, 
and keenly aware of this responsibility is the aim 
of the good cost system. 

The value to be secured from the use of cost 
data does not come from application for a day or a 
week or a month. The real results are established 
after months and years of use. Therefore it is 
important that the cost presentation be stand- 
ardized as soon as possible so that the results 
can be consistently used in exactly the same man- 
ner, month after month. After an executive has 
established a plan and policy for the use of cost 
data, it will discourage him beyond remedy if the 
method of presentation is changed or rearranged. 



COSTS 235 



This brings out the last essential qualification 
to encourage the proper use of costs — permanency. 
The executive will have no patience with data 
which this month tell him certain things under one 
heading and the next month under another heading 
or not at all. Permanency is absolutely essential 
to prompt and easy comparison which is the very 
foundation of use of this information. Changes 
should be made only when urgently advisable, 
and then only with complete understanding and 
approbation of all concerned. It is far better to 
have well established, permanent records, even 
though they have certain faults, continuously and 
consistently in use, than to have ever changing 
theoretically correct records, available but not 
used because they require new understanding and 
application each month. 



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